We get lots of enquiries from customers who are trying to decide between a Help to Buy ISA or Lifetime ISA (also called a ‘LISA’) as a means of saving for their first mortgage deposit. Both are government-backed savings products with a healthy 25% bonus up for grabs, so how will you know which is the best option for you?
We’ve pulled together the key information for borrowers looking for the best solution when saving for their first home. Speak to an expert for more tailored advice: the advisors we work with are well placed to point you in the right direction.
Help to Buy ISA vs Lifetime ISA: the key differences
Help to Buy ISAs and Lifetime ISAs share a lot of common features, but they also have a few different restrictions and benefits to be aware of that should help you decide which is best for your needs and circumstances.
What is a Help to Buy ISA?
A Help to Buy ISA is a savings account developed for first-time-buyers saving for their first deposit. They are offered by several high street banks and do not limit the customer to any particular mortgage provider. You can open one at any time, regardless of whether or not you have your sights on a particular property.
How do Help to Buy ISAs work?
A Help to Buy ISA works much like any other tax-free savings account, but savers get a 25% bonus from the government once the mortgage deposit is secured. You’ll need at least £1,200 to open the account, and the bonus is guaranteed up to a balance of £12,000.
Once opened, you can pay up to £200 per month, and the maximum bonus is £3,000. While the bonus is predicated on securing a mortgage deposit on property valued at up to £250,000 (or £450,000 in London), you can withdraw some or all of your own funds at any time, without penalty.
Who can open a Help to Buy ISA?
Anyone living in the UK who is aged 16 or over and classed as a first-time buyer. This means you won’t be eligible if you’ve ever bought a property in the past, even if you did so abroad. There is no upper age limit, and you can still take one out as an individual if you’re buying with a partner who has previously owned property.
What is a Lifetime ISA or LISA?
A Lifetime ISA or LISA is a type of longer-term savings account that can be used for various purposes such as a first mortgage deposit or for retirement. Like a H2B ISA it offers a government-funded bonus, but it differs in that its usage is not limited to saving for a home and a more generous amount can be paid in per year. However, it also has different restrictions, including who can qualify for one and how soon borrowers can access their funds.
How does a Lifetime ISA work?
A Lifetime ISA provides you with a government bonus of 25% on your total savings balance, which is calculated and added in on a monthly basis. This continues until you reach the age of 50, at which point the account stays open but the government contributions stop, and you’ll no longer be able to deposit further funds. You can put in up to £4,000 each year and bonuses are only payable after a full tax year.
Unlike a Help to Buy ISA you cannot access your funds without penalty except in specific circumstances, detailed below - you will otherwise be subject to significant penalties.
How much could you earn with a LISA?
The maximum bonus you could receive on a LISA is £32,000. Accessing the funds is restricted to certain scenarios: you can choose whether to use the savings for a mortgage deposit or to access them in later life.
When can I withdraw funds from a Lifetime ISA?
If you’re buying a home the funds are available when the deposit is secured, but the account must be open for at least 1 year before you can use it to buy a home. If saving for retirement, they become available when you reach the age of 60. The only other time that funds can be made available is if you’re terminally ill with less than 12 months to live. Otherwise you’ll have to pay a 25% charge if you want to withdraw for another reason.
Who can open a Lifetime ISA?
To qualify for a Lifetime ISA you need to be aged between 18 and 39 and a UK resident, and if you’re using it for a deposit, you’ll have to be a first-time buyer as well. Regardless of what you use it for, you can deposit into the account and claim the 25% bonus until you reach the age of 50.
Can I use a Lifetime ISA if I’m a first-time buyer?
Yes, in fact you will need to be a first-time buyer if you’re planning to put your LISA funds towards the purchase of a property. To qualify for the government bonus, you will need to have opened your account 12 months before purchasing the property.
Can I have both a Help to Buy ISA and a Lifetime ISA at the same time?
We often hear questions like “can you pay into a Help to Buy ISA and a Lifetime ISA?”, and the answer is yes.
You can hold both a Lifetime ISA and Help to Buy ISA at the same time, but you can only use one of them for purchasing your first home. However, you could still get the 25% bonus on a LISA having used a Help to Buy ISA if you opt to use it for retirement.
Can I transfer Help to Buy to Lifetime ISA?
Yes, transferring a Help to Buy ISA to a Lifetime ISA is possible, and you will still be eligible for the 25% bonus. You will of course have to stay within the £4,000 annual allowance when you move any funds into a LISA, so if you have more than this saved in a H2B ISA you will have to transfer it across multiple tax years. Speak to an expert if you want to arrange a Help to Buy ISA transfer on the best terms for you.
Help to buy ISA vs LISA: which should I choose?
Addressing the LISA vs Help to Buy ISA dilemma will depend entirely on your circumstances; your reasons for saving, how long you’re likely to be saving for, your age and many other factors. But generally speaking, if you have the choice of both a Help to Buy ISA is more appropriate if you are looking to save for a deposit in the shorter term, and a Lifetime ISA, as its name suggests, is a good longer-term option.
If you are saving for a year, a Lifetime ISA would allow you to pay in £4,000 in the first year, while a HTB ISA only allows for £1,200 initial deposit plus £200 per calendar month therefore, up to £3,400 in first year. If you go on to subsequent years, a Help to Buy ISA will only allow £2,400 per year versus £4,000 for a LISA.
Remember that while a LISA offers more generous gains over a number of years, it has more restrictive clauses and penalties around earlier withdrawal. You may also have the option of transferring Help to Buy ISA to Lifetime ISA should you plans change - and depending on your age you could still open a LISA for retirement purposes only, even after using a H2B ISA for your first mortgage deposit, although keep in mind that a LISA only pays its bonus at the end of the tax year, while HTB ISA bonus is paid at any time, upon redemption.
Getting the best mortgage with your help to buy isa or lifetime isa
Whether you decide to go for a LISA or Help to buy ISA, once you’ve saved enough to put down a deposit on your first home and claimed the government bonus, the next stage is no different from any other mortgage application. Using a H2B ISA or LISA won’t limit you in terms of which lenders you can approach, so we recommend you speak to an all-of-market advisor to get access to the best deals for you.
What size deposit do I need?
Most lenders will ask for a deposit of at least 5%, and many will require 10%, 15% or more depending on factors such as your credit history, your age, the type and location of the property you’re buying, and how you receive your income.
A Help to Buy ISA and the Help to Buy equity loan scheme can be used in conjunction with each other, which can help borrowers with the minimum deposit of 5% get on the property ladder.
If you’re a perfect fit for your lender in terms of their policies on all of these factors you’ll be able to pay a lower deposit, whereas if you have a more complicated profile with a lot of bad credit for example, you’ll be seen as higher risk and the lender will usually ask for a higher deposit, and you may need to find a more specialist lender - speak to an expert for the best advice.
What size mortgage can I afford?
Every lender has its own views on what ‘affordability’ looks like, but most will lend 4 x your salary, some will offer 5 x and a handful will go up to 6 x your annual earnings in the right circumstances.
Speak to an expert on Help to Buy ISAs today!
Whether you want to go for a Lifetime ISA or help to buy ISA or if you’re still not sure, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.
*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA.Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
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