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Help to Buy ISA versus Lifetime ISA

Category: ISAs
Author: Tim Leonard
Updated: 05/04/2019

At a glance:

  • Both the Help to Buy ISA and the Lifetime ISA allow you to save for your first home deposit without paying tax and while enjoying a Government bonus of 25%.
  • The Lifetime ISA can also be used to save for retirement, but does come with more restrictions than the Help to Buy ISA.
  • While you can have both, the bonus from only one of the account can be used for that first home purchase.

Since the introduction of the lifetime ISA (LISA) in April 2017, those who are eligible have two options to save for their first home deposit with the help of a Government bonus and without paying tax - the Help to Buy ISA and the LISA. But which one is better? The answer will undoubtedly depend on your individual circumstances, but here's a quick run-through of the main points to consider.

Pros and cons

While both types of account can be used to save for a first home, the lifetime ISA has the added advantage of being useable for retirement saving as well. Depending on the provider, it may even be possible to use the LISA to pay for your deposit while keeping the account open (by keeping a minimum amount in it) and then save for retirement as well. Just bear in mind that you can only have one Lifetime ISA account at a time, and can't open a new one once you've reached the age of 40.

However, the lifetime ISA is a lot stricter if you think you may want to take money out of the account for any reason other than retirement or, buying a first home, or due to terminal illness or death. Accessing the money for other reasons will result in a hefty 25% penalty, unlike with a Help to Buy ISA, where access restrictions are far less severe and typically depend on the individual provider.

Each account certainly has their advantages and disadvantages, so to make things easier, we've summarised their main features side-by-side in the table below to help you decide which one's for you.

Help to Buy ISA Lifetime ISA
Find productsFind Help to Buy ISAsFind Lifetime ISAs
Eligibility Available to any UK resident aged 16+ who is a genuine first-time buyer Savers must be aged between 18 and 39
Investment An initial deposit of up to £1,200, then up to £200 per month thereafter Up to £4,000 can be saved per tax year
Bonus 25% Government bonus on the full amount saved, up to £3,000. The bonus won't be added to your ISA until you complete a mortgage, with the bonus payment arranged on your behalf by your solicitor 25% Government bonus until the age of 50 (max. £1,000 per year, up to a maximum potential bonus of £32,000). The bonus is paid annually and added to your pot, giving you a higher balance on which to earn interest
Risk The Help to Buy ISA is a form of cash ISA, which means you will get a variable or fixed rate of interest and that your capital is protected (just make sure the provider operates under the FSCS or a similar compensation scheme). As such, it's a zero-risk form of saving, in line with traditional savings products Almost all lifetime ISAs are of the stocks & shares variety, which means your money would be invested in the stock market. This is a lot riskier than investing in a cash ISA as your returns aren't guaranteed, and nor is your initial investment, so you'll need to be prepared for that level of risk. Having said that, there are three cash LISAs available at the moment
Interest As a cash ISA, you will have a pretty good idea of the interest that you will get, even if you choose a variable rate account. The exact interest rate will of course depend on what account you choose, so comparing the options and finding a competitive ISA product is crucial Investing in a stocks & shares LISA means you won't get a set interest rate. You can secure much larger returns than with regular cash ISAs, but at the same time you also run the risk of losing money due to the unpredictable nature of the stock market. The three currently available cash LISAs do allow you to earn interest in the usual way, though they offer a lower rate than most Help to Buy ISAs
  • After an initial investment of £1,200, you will only be able to save up to £200 per month
  • You'll need to save at least £1,600 in order to receive the bonus
  • To receive the maximum £3,000 bonus, you'll need to save £12,000, which would take just over four years to achieve based on the current investment allowance
  • The money must be used to purchase your first property in the UK that costs no more than £250,000 (£450,000 in London)
  • The bonus won't be applied until the completion stage of the purchase of your first home - you will never see it yourself
  • You can't open a Help to Buy ISA if you've already got an active cash ISA for the tax year; you'll need to transfer your active funds (max £1,200) into a new Help to Buy ISA to open one
  • Can only be opened by people who are between 18 and 39 years old
  • You can only save £4,000 per year (which will become £5,000 with the bonus)
  • After the age of 50 you cannot add any more funds and will no longer receive the bonus
  • Must be used for a first home in the UK worth up to £450,000 or for retirement (for the latter, funds can be released after the age of 60)
  • The funds can only be used for a property purchase after 12 months of having a LISA. They'll be used at exchange and will go straight to your solicitor
  • Unlike a Help to Buy ISA, there is a 25% penalty to withdraw your funds from a LISA if you use it for any reason other than those specified, which could leave you with less than you've put in

It's worth pointing out that you can have one of each account, but you can only use the Government bonus from one account to buy your first home. Furthermore, if you're buying a first home with a partner, both of you can have a Help to Buy or lifetime ISA to benefit from double the bonus.

Now, it may well be that circumstances will change in future, which could make one or the other more attractive. More cash lifetime ISAs may be announced, and the Help to Buy ISA scheme is currently scheduled to close to new savers on 30 November 2019 - though the Government could choose to extend it. To get the most up-to-date information on these two ISAs, go to the respective Help to Buy and Lifetime ISA pages.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.