Help To Buy ISA or LISA As Deadline Day Approaches?
In just another 25 days, on December 1st, the door will slam shut on the possibility for new Help to Buy ISAs to be opened. Which means any potential first time home buyers have just 24 days to take advantage of a scheme that comes with a government-funded £3000 top-up towards a first property. But the Lifetime ISA, or LISA, essentially introduced in the stead of the discontinued Help to Buy ISA, isn’t going away for the foreseeable future. So does it make sense to rush to open a Help to Buy ISA before the end of the day on November 30th? Or is a less time-pressured LISA just as good an option for long term savers with their eye on raising a deposit?
The Help to Buy ISA was launched in 2015 but have not been an unqualified success – which is probably why the LISA was introduced. The savings product has been criticised for leading to a bureaucratic headache and not being fit for purpose because the government top-up bonus of 25 pence to every pound saved, up to a maximum added contribution of £3000 to a £12,000 total, is only paid out after contracts on a property have been exchanged.
Which means the only way the top-up can be used towards a deposit, the part of buying a first home that represents the most commonly encountered struggle, is if the lender agrees to discount it and then see the deposit topped up post-contract exchange. Or an unnecessarily complicated additional short term loan, paid back after contract exchange, is applied for.
The Help to Buy scheme also stands accused of unnaturally inflating property prices. The suspicion is that the government top-ups for first time buyers have not in fact saved those buyers any money – it’s just been folded into higher selling prices that take account of it. And despite around 250,000 first time buyers having taken advantage of a Help to Buy ISA over the past four years, it hasn’t proven as popular as hoped. That’s demonstrated by the fact the government bonuses to Help to Buy ISAs only total around a quarter of the expense originally earmarked.
But, with only £1 pound needed to open a Help to Buy ISA before the December 1st deadline, and savings into it then still eligible for the 25% top up for another 10 years, does it make sense to just open one in addition to or instead of a LISA?
LISAs, available to anyone still under the age of 40 at the time the wrapper is opened, have many similarities to Help to Buy ISAs. Saving into a LISA also comes with a 25% government top-up worth up to £1000 a year. But LISAs are more flexible. Their contents can also be used towards a home deposit. But LISA holders can also choose to keep their money invested until the age of 60, without any of the top-up being forfeit.
The LISA has, however, also gotten off to a slow start and last year’s 166,000 Lisa accounts opened were far below Treasury targets. A lot of financial institutions are also reticent to offer LISAs to their customers, arguing they are both confusing and not the best way to save towards a pension. Be that as it may, for prospective first time home buyers who miss the Help to Buy ISA cut-off deadline, a LISA is a good way to save towards a deposit. The government top-up also comes with the advantage of being added without the need for contracts to have been exchanged. You just need to demonstrate it was used towards your deposit afterwards.
The downside to a LISA is that if funds are not, in the end, used towards the deposit for a first step onto the property ladder, they are locked up until the holder is 60. At least unless they are willing to pay back the top-up plus a 6.25% additional penalty. There are calls to have the additional penalty removed, which may well happen at some point. The upside is, unlike a traditional pension pot, money taken out of a LISA after the age of sixty is completely tax free.
But this year LISAs do seem to be getting more popular. The Nottingham Building Society, one of just a handful of traditional banks and building societies already offering the wrapper, has said it has had eight times more LISA applications this year than it has for Help to Buy ISAs.
Overall, both the Help to Buy ISA and LISA have their plusses and minuses. But both are certainly worth considering for first time home buyers. Unfortunately, while it’s possible to open both a Help to Buy ISA and a LISA, the holder is only eligible to receive the first time buyer’s government top-up on one.
MoneySavingExpert’s Martin Lewis argues that because of the strengths and weaknesses of both forms of ISA, it makes sense to beat the Help to Buy deadline, even if it’s just to open the ISA with £1, so the opportunity stays open for another 10 years. He also very nicely outlines the pros and cons of both in an article on the topic.
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