Do you know of a friend of family member struggling to get onto the housing ladder?
If so you’re likely to know house prices are continuing to rise despite the ongoing cost-of-living crisis. So much so that a recent study by the Homeowners’ Alliance indicates that 87% of UK adults and 91% of aspiring first time buyers say the ability to get on the housing ladder is a serious issue.
However, it isn’t all doom and gloom for first time buyers!
At the start of August, the Bank of England announced they would scrap a key affordability test. This could mean far more people are able to get on the ladder as they are potentially able to take out larger mortgages.
Whilst this is a positive step it is important that first time buyers do not get complacent and use relevant tools available to help save for their house deposit.
Two of the best ways to save for a deposit are to contribute to a Help to Buy ISA or a Lifetime ISA (LISA), as they provide a tax-free way of saving. However, this begs the question, which is best?
Help to Buy ISAs
Whilst no longer available to new applicants, anyone holding a Help to Buy ISA can continue to save into them until November 2029.
They are a form of Cash ISA, in which the holder can contribute £200 per month and the government will then top this up by 25% (up to a maximum of £3,000) when purchasing a qualifying home.
As they are a Cash ISA there is no risk to your savings but the only growth available is provided by way of interest. Whilst interest rates are on the rise they are still far below the rate of inflation.
If you missed out on a Help to Buy ISA, there is no need to panic…
Lifetime ISAs
The Lifetime ISA (or LISA) was introduced in April 2017 to provide a more flexible way of saving for a first home or retirement.
They are available in both Cash ISA and Stocks and Shares ISA forms. This means your savings can be invested in funds or shares, which increases the potential of achieving capital growth. The holder can contribute up to £4,000 each tax year and the government will top this up by 25% not long after the contributions are made.
ISA rules can become complicated and the chopping and changing of legislation has muddied the water. This is not an ideal scenario for first time buyers trying to tackle their greatest financial commitment to date!
To provide greater clarity we have compared the different solutions below:
| Help to Buy ISA | Lifetime ISA
(For property purchase) |
|
| Eligibility | Not open to new applicants | Anyone aged 18 to 39 |
| Maximum annual contribution | £2,400
(£3,400 in year one only) |
£4,000 |
| Maximum government bonus available | £4,000 | £33,000
(Assuming maximum contributions every year from age 19 to 49) |
| Contribution frequency | Can be paid monthly | Can be paid monthly or as a lump sum |
| What can it be used for? | Mortgage Deposit | House and Mortgage Deposit |
| How quickly can you use it? | After £1,600 has been saved
(Can be done in a minimum of 3 month) |
12 months after being opened |
| Payment of bonus/ loan | On completion of purchase | Monthly |
| Penalties if not used for qualifying purchase | Do not receive bonus | 25% withdrawal charge |
| Maximum property price | £250,000
(£450,000 in London) |
£450,000
|
| Investment Options | Cash only | Cash, Funds and Shares |
Considerations
As you can see from the above, the potential LISA bonus available blows the potential Help to Buy bonus out of the water!
However, as they say size isn’t always everything.
Unlike the Help to Buy ISA, non-qualifying withdrawals from a LISA are subject to a 25% withdrawal charge. This means that before investing you should be sure that you will purchase a house for less than £450,000 and not in the next 12 months.
Another point that is not as obvious but worth considering is the LISA bonus is paid weeks after a contribution. As the LISA is available in Stocks and Shares form, the bonus can be invested and potentially benefit from interest and dividends payable, thereby increasing the potential value of your deposit via compound returns.
The Help to Buy ISA meanwhile only receives the bonus upon the completion of the property purchase. This not only means that you do not benefit from compounding returns but also the bonus can’t be used in the mortgage provider’s calculation of your deposit.
Please note if you are aiming to purchase a home in the short term (within the next five years), investing in a Stocks and Shares LISA may not be appropriate given the likelihood of market volatility and the potential for market downturns.
If you choose the Cash ISA route (available with either Help to Buy ISAs or LISAs), it is important that research the rates available with the different providers.
Summary
So, if you’re unlikely to purchase a property in the next 12 months AND are aged between 18 and 39 you may be thinking of switching your Help to Buy ISA to a LISA.
If you are, you can open a LISA and request your Help to Buy ISA is switched over, although this may need to be done over multiple tax years.
It’s also important to remember you have a total ISA allowance of £20,000 each year. Therefore, once you have maximised your Help to Buy or LISA allowance you can top up your other Stocks and Shares ISA or Cash ISA with any surplus cash.
Whatever route you choose to go down given this red-hot housing market shows no signs of cooling down the potential benefits and bonuses on offer are too generous to continue to ignore!
If you wish to discuss the best options for saving for a home deposit or any investment solution, please contact your Financial Planner and they will be more than happy to discuss these areas with you.
