Pete Mugleston | Mortgage AdvisorPete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.
Updated: 4th December 2019 *
*UPDATE: The Help to Buy scheme is now closed to new applicants, however, first-time buyers still have many options. To find out more, read our guide.
We get lots of enquiries from customers who are trying to decide between a Help to Buy ISA or Lifetime ISA 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.
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A Help to Buy (H2B) ISA is a savings account developed for first-time buyers who want to save 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.
Quick Facts: Help to Buy ISAs
You can use a max of £1,200 to open the account
Savers get a 25% bonus from the government on top of any contributions
You can earn a maximum of £3,000 from the government in total
The maximum a H2B ISA account can have is £12,000
Once opened, you can pay up to £200 per month
You can withdraw your funds at any time without incurring a 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.
Help to Buy ISAs closing: The details
As of 30th November 2019, Help to Buy ISAs are closing to new applicants.
New applicants can still apply for a H2B ISA before this date, and the benefits will still be the same even once the scheme ends. After this date, existing applicants will still be able to access and pay into their H2B accounts.
Alternatively, existing members can transfer up to £4,000 of their H2B ISA funds into a Lifetime ISA. For more information about transferring your funds, speak to an expert. They'll be able to talk you through your options and see what's best for you.
What is a Lifetime ISA?
A Lifetime ISA 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.
Quick facts: Lifetime ISAs
To open, you can deposit a £4,000 lump sum or make multiple payments across a year
You can contribute a maximum of £4,000 a year (subject to other ISA payments)
The government will add 25% to your savings, so you could get an extra £1,000 a year max
You need to be age 18–39 to open a Lifetime ISA
You can keep topping up your account until you’re 50
You could earn up to £32,000 of government bonus payments
Lifetime ISA contributions can be used for both mortgage and deposit contributions
If you want to access your funds within 12 months of setting up your Lifetime ISA, you will may have to pay a penalty (except in specific circumstances).
When can I withdraw funds?
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 purchase a property.
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 is eligible?
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 Lifetime ISA 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.
Help to Buy ISA vs Lifetime ISA: The 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.
Some of the key differences are as follows:
Max ISA contributions
With a Lifetime ISA, you can contribute
a maximum of £4,000 per year (though this is subject to other ISA contributions
you may have), plus you’ll get a top-up of 25% from the government on top of
what you put in. If you decide to not put the funds towards your first home
deposit (both mortgage and deposit), you can use the funds for retirement.
With a Help to Buy ISA, you
can only contribute up to £1,200 when you first open your account, and you can
only deposit up to £200 a month thereafter. You can contribute a total of
£12,000 overall and the maximum government bonus you can get is £3,000, though
you’ll only get this once you’ve completed your house purchase and cannot be
used as a deposit.
While a Help to Buy ISA may have more restrictions, if you're looking to purchase a property within the next year, then a H2B ISA may be the best option for you as you can use these funds without incurring a penalty.
A Lifetime ISA, on the other hand, is better suited aid your mortgage or deposit amount after 12 months to avoid paying a penalty.
Can I have 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 Lifetime ISA 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 Lifetime ISA, 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 Vs Lifetime ISA: Which should I choose?
Addressing the Lifetime ISA 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 the 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 Lifetime ISA.
Remember that while a Lifetime ISA 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 Lifetime ISA for retirement purposes only.
This is even after using a H2B ISA for your first mortgage deposit, although keep in mind that a Lifetime ISA 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
Whether you decide to go for a Lifetime ISA 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 Lifetime ISA 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.
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 ISAs today!
If you want more information about Lifetime ISAs or Help to Buy ISAs, call us on 0808 189 2301 or make an enquiry here.
We'll then match you with the best expert for your circumstances. There's no obligation to make a purchase and we don't charge you a penny.
*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.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
Read more about Pete here...