The Isas that help you buy your own home

20 March 2018

If you’re saving up for a deposit for your first home, there are now two specialist Isas to choose from.

Find out which one will suit you Cash Isas have long been used as a vehicle for people to save for their first home, but now there are two kinds of Isas specifically designed for this.

The Help to Buy Isa (H2B Isa), launched in December 2015, and the Lifetime Isa (Lisa), which followed in April 2017, both give first-time buyers a boost when saving for a deposit, though there are limits to how much you can save and what the cash can be used for.

Help raising a deposit

The H2B Isa offers higher rates of interest than a typical Cash Isa and the government contributes a 25% bonus on top of what you’ve saved.

You can pay up to £200 a month into it, plus an additional £1,000 in the first month. This means you can save up to £3,400 in the first year and then £2,400 each year thereafter.

A 25% bonus is given to account holders when a house purchase is completed, up to a total maximum bonus of £3,000 – to receive that, you need to have saved £12,000.

However, it is important to note the bonus is only paid upon completion. This means it can be used for the mortgage deposit, but not for the exchange deposit or any other costs the buyer incurs prior to completion.

This account is only available to people who have never owned a home, or part of a home, in the past. If you’re buying as a couple, both of you can hold a H2B Isa and receive a government bonus. There are no age restrictions on this account.

The Moneywise Best Buy is the Barclays Help to Buy Isa, which pays 2.53% to savers and can be opened in branch, online or by phone. This is the best open-to-all account, but be sure to check with your local building society as the Cumberland, Darlington, Newcastle, Penrith, Tipton & Coseley and Vernon building societies all offer higher rates to local customers.

Remember that the H2B Isa is considered a version of the Cash Isa, which means, in most cases, you can’t pay into both types of account in the same tax year. A few providers – such as Aldermore and Nationwide – offer a split Isa, which means you can max out your full £20,000 yearly Isa allowance between the different Isa products.

An Isa to last a lifetime

The new kid on the block is the Lisa, which launched a year ago. This offers more options than the H2B Isa, as you can choose to save cash or invest in stocks and shares.

Money in a Lisa can be used for more than just buying a first home – you can also use it to save towards your retirement. Anyone aged between 18 and 39 can save up to £4,000 in a Lisa each tax year, and this can be put in the account as a lump sum or you can drip-feed the money in at any point during the year.

A 25% bonus is added to your account when you make a deposit, up to a limit of £1,000 a year, and the maximum total bonus is £32,000, as you can receive bonuses every year from age 18 until you turn 50.

Another benefit is that the government bonus is added to your account immediately, meaning you can use it for both the mortgage and exchange deposits.

As with the H2B Isa, you’ll need to be a first-time buyer if you want to use the funds to purchase a home. Although one group of people who would be better suited to a H2B Isa are those planning to buy in the next year. This type of Isa, including bonus, can be used at any time, while a Lisa needs to be open for a year before you can buy a home.

If you’re not going to be a first-time buyer or decide not to purchase a home with a Lisa, you can use it to fund the costs of your retirement. However, withdrawals from the Lisa before you reach the age of 60 (and are not buying a house) will incur a 6.25% penalty, although you can withdraw cash for your retirement penalty free once you reach the age of 60.

This means if you’re planning to save for retirement, many people will fi nd a workplace pension is a better option as you’ll get an employer contribution as well as tax relief on contributions.

In contrast, if you change your mind and decide not to buy a home with the H2B Isa, there are no penalties for withdrawing your cash.

Another issue with the Lisa is the lack of support from the banking industry. Just one provider, Skipton Building Society, offers the cash version of the Lisa – but it only pays a meagre 0.75%.

More providers offer the stocks and shares version, but many leading stockbrokers are yet to launch products. AJ Bell, Hargreaves Lansdown and The Share Centre are three of the major players currently offering a stocks and shares Lisa product.

If you choose to invest, you have the prospects of greater growth for your money over time, but if your investments perform poorly you may get out less than you put in.

As with the H2B Isa, if you’re in a couple, both of you can hold a Lisa and use the bonus towards a joint first home.

While you can transfer your H2B Isa into a Lisa and receive the 25% government bonus at any time, you must do this before 5 April 2018 if you don’t want the savings to eat into your yearly £4,000 Lisa allowance. After 5 April 2018, any funds you transfer across will count towards your £4,000 yearly limit.

While the top-paying Lisa has a lower rate of interest than many H2B Isas, the larger government bonus means that most people will get more from saving in a Lisa, thanks to the bigger annual allowance.

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