The Help to Buy ISA is scheduled to close to new investors on November 30th, 2019. Hence, until that date, you have the option of choosing whether to open a Help to Buy ISA or a Lifetime ISA, also known as a LISA.
The LISA, which launched April 6th, 2017, is a hybrid product that covers the same ground as the Help to Buy ISA, i.e., as a help to first time property buyers. The LISA can also be used as a pension supplement with subscriptions continuing till the investor turns 50 years old.
Eight points to consider when making the choice between the Help to Buy ISA or the LISA
- Who can open a Help to Buy ISA or LISA?
For the Help to Buy ISA, any UK resident over 16 years old, whom has never owned a property. The LISA can be opened by any UK resident between the ages of 18 and 39.
- When do you intend buying a property?
If within the next year, then the Help to Buy is the only option as the LISA can only be used for a first-time house purchase 12 months after the date of the first subscription. Bear in mind, you will need to have saved a minimum of £ 1,600.00 to get your Help to Buy bonus.
- How much bonus can you potentially earn?
Given the LISA’s hybrid nature, i.e., that it can be used in retirement as well as to buy your first home, then the LISA wins hands down. If you open a LISA at 18 and subscribe the maximum allowance until your 50th birthday, currently £ 4,000.00 per tax year, then you will have earned government bonuses of £ 32,000.00, which can be withdrawn, without penalty, when you turn 60 years old. With the Help to Buy ISA, the bonus is only paid on the first £ 12,000.00 of savings, hence your maximum bonus is £ 3,000.00.
- Do you want to use the government bonus towards the house deposit?
If the answer is yes, then the LISA is your only option, as your Conveyancer can request a withdrawal from the LISA, without penalty, as soon as your offer has been accepted. In contrast, the Help to Buy ISA bonus will only be paid when the property sale has completed.
- Will you need to make withdrawals before buying your home?
If the answer is yes, then beware of the LISA. As a withdrawal, other than for a life event (click here for my LISA overview), will incur a 25 % penalty charge. This means you give back the bonuses earned on that money, but you also pay 25 % on interest or capital gains withdrawn. There is no penalty charge on Help to Buy withdrawals, but, of course, you’ll have lost the potential to earn the government bonus on that money and can only replace it at a rate of £ 200.00 a month.
- Do you want to invest in cash or stocks and shares?
The help to Buy ISA is cash product only, but the LISA comes in 2 flavours, it can be cash or a stocks and shares version. It can be pointed out that Cash LISA’s are not widely available and currently there are only 3 Cash LISA providers. Though there are a decent number of Stocks and Shares LISA providers.
- When do I get the bonus?
Here the LISA is the big winner, as it is paid into your LISA account approximately 4 weeks after the subscription. With the Help to Buy ISA, you never see the bonus, it is claimed by your Solicitor when the house purpose completes.
This is a big factor in favour of the LISA, in my opinion, as it means you almost immediately get the benefit of earning interest on the government bonus, and in the case of a Stocks and Shares LISA, that bonus can be invested and potentially earning you capital gains.
- Will you want to keep the account open after buying your first home?
With the help to buy ISA that is not possible and would serve no purpose anyway, as its sole aim is to aid first time home buyers. In contrast, the LISA can continue to receive subscriptions up to the investor’s 50th birthday, and allow withdrawals, without penalty charge, at 60 years old.
With the LISA you could potentially use it to help buy your first home, keep some funds in the account and then use it to save for your retirement.
Conclusion
Both products have their pros and cons, but, in my personal opinion, unless you foresee the need to make withdrawals before buying your first home, then the LISA is the better option. It has a potentially larger bonus, can be invested in stocks and shares, the bonus is paid into the account within a month and it can be used to save for retirement as well.
Note, though you can open both a LISA and a Help to Buy ISA, the government will only allow you to use the bonus from one of the accounts when buying your first home.