November 10, 2019
Let’s face it, buying your first house is expensive, it’s never been easy, Nicky and I purchased our fist house in 1996 and it was expensive then, thanks to her parents generosity, they made it a little easier for us, but what if you don’t have this kind of benefit?
Well, in December 2015 the government launched the Help to Buy ISA, an ISA savings plan, that gives a bonus when you buy your first home. The government announced in 2017 that over 1 million Help to Buy ISAs have been opened, and more than £1.8 billion has been saved into these ISAs, to help first time buyers get onto the housing ladder.
If you want to open a Help to Buy ISA, you will need to be quick because the Help to Buy ISA is due to close to new customers on 30th November, but if you already have an account open, don’t panic you can continue contributing.
However, don’t despair the successor to the Help to Buy ISA was launched back in April 2017 and is well underway, so until the end of the month, you have two options to help you save for your first home, the Help to Buy ISA and the Lifetime ISA, often referred to as the LISA.
So, what’s the difference between these two ISAs?
The youngest age you can open a Help to Buy ISA is 16 which is younger than the LISA, so if you’ve just finished your GCSE’s and you’re wanting to save for your first pad, open a Help to Buy ISA. The LISA can be opened from age 18 to 39 and you can continue saving until you’re 50.
You can save up to £4000 pa into a LISA (subject to the overall ISA limit of £20000) and you’ll receive a generous government bonus of 25% on whatever you contribute, if you were to encash, or use the LISA within the first 12 months, this bonus is removed.
The Help to Buy ISA is stricter on the contributions, with an initial contribution limit of £1200 when the account is first opened, then a maximum monthly contribution of £200, no additional lump sums are permitted, however there’s no penalty if you withdraw money, you just don’t get the bonus.
At the point the Help to Buy ISA is used to buy your first home, a 25% bonus is added to all the money you have paid in, including interest. However, there are some exceptions, which include;
The bonus scheme is set to run until December 2030, but I can’t see there being many Help to Buy ISAs around then.
Technically there is no minimum term, but to get or keep the bonus, there is. With the Help to Buy ISA, you need to save at least £1600 to get the 25% or £400 bonus, so a minimum term of three months (£1200 in the first month plus two months at £200pm)
To keep the bonus with the LISA, you must have the account for at least 12 months.
You can only have one Help to Buy ISA provider, period. However, you can have a new LISA provider each new tax year, if you wish.
Remember, if you are buying with your partner, or friend, you can have a Help to Buy, or a LISA each.
The LISA allows for your savings to be used towards the purchase of your first home, like a Help to Buy ISA, but also it allows you to keep the investment and use the money for retirement too. So, if you decide that it is just too expensive to buy a house all is not lost, the money can be used to top up your retirement income from age 60.
There are limits on the value of the house you can purchase the Help to Buy ISA limits the purchase price to £250,000, outside of London, or £450,000 in London. For most first-time buyers, this is a nice problem to be faced with, however with the LISA, the London differential has been removed and your purchase limit is £450,000 regardless of location.
If things don’t work out and you need your money back, the Help to Buy is a better choice as no penalty is applied for withdrawing your money. However, with the LISA you’ll face a penalty of 25% on the amount withdrawn, this is not quite as bad as it initially looks, because after repaying your bonus, the way the numbers work, it relates to about 6.25% penalty on what you paid in. The cynic in my says that the government hates exit charges on any other regulated product, other than it’s own!
With he Help to Buy ISA, it is a cash-based ISA and will be opened with either a bank, or building society. The LISA can either be cash-based (ideal if you have less than 7 years until you need the money), or investment based (perfect for longer term savings). Therefore, banks and investment providers are offering LISAs.
With the Help to Buy ISA, you will close your account down, transfer the fund, usually to your conveyancer’s client account. You will need to provide your conveyancer your closing letter from your Help to Buy provider, so they can claim your 25% bonus, between exchange of contracts and completion. This can take some time, and you can be charge £50+VAT for the work.
The Help to Buy money you have saved, plus interest, can be used on exchange, but not the bonus, this can only be used on completion.
The LISA, is a similar process, don’t just withdraw the money you’ll be penalised, you need to apply to the LISA provider for the money to be sent to your conveyancer. The money can be used for your exchange deposit (the money you hand over when you “exchange” contracts). However, this must be done less than 90 days ahead of your completion, when you hand over the rest of the money and get the keys.
If the sale falls through your conveyancer will be able to put the money and bonus back into your LISA – though it must be the exact same amount.
However, if there was mistake and you weren’t eligible to use the bonus, say the property actually cost more than £450,000, then you’ll be hit with withdrawal charges – so make sure you can use the cash before it’s taken out of the LISA.