Buying your first home is no easy task. The outlay for deposits and fees can seem insurmountable given the prices in the property market. However, the government has introduced Help to Buy ISAs and Lifetime ISAs to give first-time home buyers the much-needed support to get on the property ladder. We’ve put together this handy guide to show you the pros and cons of both ISAs and help you find the best plan for you.
ISA stands for Individual Savings Account. This account is a tax-free way for people to save and invest. A regular savings account charges income tax on any interest you earn. ISAs differ in their formats with cash ISAs, Stocks and Shares ISAs. Below you’ll find a break-down of each type of ISA and how they figure in the government’s Help to Buy ISA and Lifetime ISA plans.
Cash ISAs work similarly to regular savings accounts. You earn a percentage from your bank or building society on the amount in the account. This sum is untouched by tax but is limited to how much you can put away each year. Your interest can be fixed or variable and is provided by your financial provider. There are several restrictions on Cash ISAs that are worth taking into consideration. Cash ISAs are only available for UK residents from 16 years of age and there will be a maximum amount of money that can be invested a year.
Stocks and Shares ISAs are a tax-efficient way to invest. This ISA sees your money invested in corporate and government bonds, shares and stocks, or a combination of these to garner you the greatest payout. Much like the Cash ISA, this form of ISA is free of capital gains tax and dividends tax. However, it is important to remember that stocks and shares can fluctuate, meaning your investment can go up or down depending on the stock market. This form can be riskier than a Cash ISA but can also yield higher returns. A Stocks and Shares ISA is beneficial for people with no debts, rainy day funds or savings. Furthermore, people interested in a Stocks and Shares ISA should be comfortable investing money in an account for the long-term, as withdrawing from the account can incur penalty costs.
The British government introduced several ISA schemes to help first-time buyers to save money for a mortgage deposit. The Help to Buy ISA and the Lifetime ISA or LISA. Both have certain advantages and disadvantages and will appeal to people in different circumstances. Below you’ll find a breakdown of each type of ISA scheme to help you find the best fit for your future.
The Help to Buy ISA is a tax-free saving account to use towards buying a new house. This ISA is only available to first-time buyers over 16 years of age. This means you cannot already own or part-own any property. This ISA requires an initial deposit of up to £1,200 with a maximum monthly contribution of £200 a month. This contribution is fixed so adding lump sums at random is not allowed. This account benefits from good interest rates as well as the government bonus so it is well worth considering.
Once you have saved for several years and want to use the money to purchase a home the government will match 25% of the full amount saved, up to a maximum of £3,000. It is important to remember that this bonus won’t be added until you complete the mortgage.
This means that you will have to match any transfer fees with money already saved. For example;
You have found a home for £120,000.
In your Help to Buy ISA, you have saved £8,000.
Before paying the mortgage deposit you will need to pay an exchange deposit to have the property taken off the market. This can range from 5%-10% of the property value. 10% of £120,000 = £12,000 While your £8,000 will cover the majority of this exchange fee, you will need to find the remaining £4,000 to complete the exchange.
The government amount of £2,000 will only come into your possession when you have been granted a mortgage.
This case is quite common and buyers can talk to sellers to agree on contract terms. In these situations, sellers are often understanding and will reduce the exchange deposit to 5% to allow you the added time needed to get your bonus.
Before opening a Help to Buy ISA, there are several restrictions that you should be aware of, including:
• After the initial investment of £1,200, you will only be able to save £200 per calendar month.
• You will need to save a minimum of £1,600 to receive the bonus. This means with a maximum of £200 a month added, you will only receive the minimum bonus after three months of saving.
• To receive the maximum bonus of £3,000 you will need to save £12,000 which can take over four years.
• The property you purchase with the ISA is capped at a maximum of £250,000 outside of the capital with properties inside London capped at £450,000.
• You can’t have more than one active Cash ISA so you’ll need to transfer your funds, up to a maximum of £1,200 into your chosen Help to Buy ISA.
Help to Buy ISAs are only attributed to one person so to maximise the benefit of the government bonus couples can invest in individual ISAs and cash out both on a single property. This brings your potential bonus up to £6,000.
A Lifetime ISA (LISA) works differently from the Help to Buy ISA. It was launched in April 2017 by HMRC. This fund can either be used to purchase a home or used as a private pension fund. To qualify you must be between the ages of 18 and 39.
The majority of Lifetime ISAs work on the system of a Stocks and Shares ISA. This means your money is not invested in a regular savings account with interest but rather invested in various shares on the stock market. This is a lot riskier as your returns aren’t guaranteed and you can even lose your initial investment. By the same token, you will also be open to greater interest rates and dividends if the markets are favourable.
Other important factors to consider when looking at Lifetime ISAs include:
• You can only save a maximum of £4,000 a year with the annual government contribution taking the total up to £5,000 per annum.
• The money in this account can only be used for a house purchase after at least 12 months.
• This money will be used right away at the exchange deposit by your solicitor.
• This fund can only be used to purchase your first home in the UK to a maximum value of £450,000.
• If used as a personal retirement, these funds will only be released after your 60th birthday.
• If you withdraw or use the money for anything other than retirement or your first house purchase you will incur a 25% penalty.
A LISA is a potentially lucrative savings account with the government bonus and stock dividends adding to your contributions. LISAs are also far more flexible with deposits and you can add lump sums at will.
Can I have both a LISA and a Help to Buy ISA?
Yes, you can have one of each account. However, you can only use the Government bonus from one of your ISAs to buy your first home.
Can I Start a LISA or Help to Buy ISA for my children?
Yes, you can open an ISA with the intention of giving it to your children for their first homes. Some banks and building societies even offer Junior ISAs for investing in your children’s future.
Is there a time limit on the Government schemes?
Yes, while the Lifetime ISA has been recently released the Help to Buy ISA is scheduled to stop taking on new savers from the 30th November 2019. This date could be extended.
Can I transfer between a Help to Buy ISA and Lifetime ISA?
Yes, some experts recommend opening a Help to Buy ISA now with its lower age threshold and traditional savings structure. Then when you have built up capital you can transfer it to a Lifetime ISA to make the most of the £450,000 threshold and potential dividends.
Whatever you choose these schemes are the best way to save for your future. The government bonus along with healthy interest rates make them some of the best savings options available. For expert advice and support, call our dedicated team. Smith Partnership Move has straight-talking, experienced conveyancers (Link to conveyancing LP) to advise you on your dream home. If you need any advice regarding ISAs or buying a property call today to get the inside track on what to do.