Buying Your First Home: Help to Buy & Lifetime ISAs
ISA stands for Individual Savings Account. The main difference between an ISA and any other savings account is that it offers tax-free interest payments, so you could get more for your money. There is a limit to how much money you can put into an ISA in each tax year, which is called the ‘ISA allowance’. The ISA allowance for the 2019/20 tax year is £20,000, meaning you can pay up to £20,000 into your ISA accounts overall throughout the tax year. You can pay the whole £20,000 into one account, or split the allowance between multiple accounts. ISA regulations state that savers are only permitted to pay into one of each type of ISA during each tax year – i.e. one Stocks and Shares ISA, one Cash ISA, and one Innovative Finance ISA. A Help to Buy Isa counts as your Cash ISA option. Essentially, this means that you can only have one ‘active’ cash ISA every year and you are not able to open multiple cash ISAs in a single tax year, and benefit from the tax-free savings allowance in every one of these cash ISAs.
Help to Buy ISAs
Now that all the boring background information has been covered, let's get into the relevance of ISAs when buying your first property. As you may or may not be aware, as of the 30th of August, there is just 3 months remaining to apply for a Help to Buy ISA. The Help to Buy ISA, which offers a sizeable 25% bonus on savings for first time buyers, will close to new applicants on the 30th of November 2019. A Help to Buy ISA is attractive to first time buyers as for every £200 saved, the government will pay a £50 bonus towards your property, giving buyers the chance to obtain a maximum tax-free bonus of £3000. As well as the government bonus, this ISA also pays interest on your savings, making it a great option for saving for a deposit. Like any other type of ISA, all savings deposited will not be taxed.
The good news is for those who already have a Help to Buy ISA, the change should not affect you - existing accounts will not be closed until December 1st 2030, giving account holders ample time to continue saving. For those who are yet to apply for a Help to Buy ISA, now is the time to do so to avoid missing out.
The primary alternative to a Help to Buy ISA is a Lifetime ISA. Similar to a help to Buy in many ways, a Lifetime ISA also assists first time buyers in saving for a property, offering a 25% bonus savings. However, there are some fundamental differences between these ISAs which we've put in a handy table for you:
As mentioned above, withdrawing money from a Lifetime ISA before the age of 60 carries a 25% withdrawal fee. However, if you use the money to buy your first property before the age of 60, you will not be charged the withdrawal penalty. If you withdraw the money after the age of 60, you can use the money in anyway you see fit. Additionally, the bonus is paid on your contributions as opposed to the overall amount saved. This means that it doesn't matter what interest rate you earn if you open a Cash Lifetime ISA, or how your investment performs if you open Stocks and Shares Lifetime ISA, as the bonus is paid on what you deposit.
In conclusion, time is running out to apply for a Help to Buy ISA, with the final date to apply being the 30th of November 2019. However, the Lifetime ISA provides a viable alternative to a Help to Buy ISA, also offering a hefty 25% government bonus on savings which can be put towards buying your first home.