What are you saving for?
If you’re putting money aside to fund the deposit you need to buy a home, then you’re not alone. The latest update from the NatWest Savings Index has revealed that buying a house is the most popular reason that Brits are saving money.
One in four people said that saving for a house was the reason they were putting money aside, ahead of other reasons such as going on holiday or simply saving for a rainy day. The research also found that it was savers in London, the South East, East Midlands, South West and West Midlands that were most likely to be saving up a deposit.
So, if you’re trying to save up enough to get onto the property ladder, where should you save? Two of the most popular options are the Help to Buy and Lifetime ISA, mainly because of the tax-efficiency and government bonus that they offer. Keep reading to learn about the pros and cons of these types of investment.
Help to Buy ISA
The Help to Buy ISA is a form of Cash ISA, which means it is essentially a tax-efficient savings account where you will get a variable or fixed rate of interest. Your savings are not at risk.
You can open a Help to Buy ISA if you’re aged 16 or over and you’re a first-time buyer. Your initial deposit can be up to £1,200 and you can then save an additional £200 per month.
When you come to buy your first home, the government will give you a bonus of 25% of the full amount you have saved, up to a maximum of £3,000 (if you have saved £12,000). You must have saved at least £1,600 to qualify for the bonus.
The money must be used to purchase your first property in the UK that costs no more than £250,000 (£450,000 in London) and the bonus is only paid once you reach the completion stage of your purchase. Your solicitor or conveyancer applies for the bonus, so you won’t ever see it yourself.
Note that the government has announced that the Help to Buy ISA scheme will close to new savers at the end of November 2019. If you want to open one you will need to do so by 30 November, and you can keep saving into your account until 30 November 2029 when accounts will close to additional contributions. You must claim your bonus by 1 December 2030.
Launched in 2017, the Lifetime ISA lets you save for a house deposit or your retirement in a tax-efficient way. There are two types of Lifetime ISA:
- Lifetime Cash ISA – you will receive a fixed or variable rate of interest on your savings and there is no risk to your capital
- Lifetime Stocks and Shares ISA – here, your money would be invested in the stock market. This is a lot riskier than investing in a Cash ISA as your returns aren’t guaranteed, and nor is your initial investment, so you’ll have to accept an element of risk.
To open a Lifetime ISA, you must be aged between 18 and 39 and you can save up to £4,000 each tax year. The £4,000 forms part of your overall annual ISA allowance and so you can still invest up to £16,000 in other ISAs in addition to your Lifetime ISA contribution.
You will also receive a government bonus of 25% of the amount that you invest, up to a maximum of £1,000 per year. This bonus is paid monthly and added to your savings, so you will benefit from compound interest. You’ll receive the bonus until you reach the age of 50, so the maximum potential bonus is £32,000.
The money you save into a Lifetime ISA must be used:
- To buy a first home in the UK worth up to £450,000 or
- For retirement – you can withdraw the funds without penalty from the age of 60 onwards
You must have held your Lifetime ISA for 12 months before you can use the funds for a property purchase. And, unlike a Help to Buy ISA, there is a 25% penalty to withdraw your funds from a Lifetime ISA if you use it for any reason other than the two specified above. This could leave you with less than you put in.
Help to Buy vs Lifetime ISA
While there are similarities between the two types of account there are also some key differences. For example, the bonus you receive on a Lifetime ISA is paid monthly and so you’ll benefit from compound growth (unlike a Help to Buy ISA when the bonus is added at the point you buy a property).
You can also save more into a Lifetime ISA, meaning there is more potential bonus to be earned.
It’s also worth noting that both types of ISA can be opened in individual names. So, if you’re planning on buying a property jointly, the other person can also open and save into an ISA to benefit from the government bonus.
And, while it is possible to open both a Help to Buy and a Lifetime ISA, you’ll only receive the government bonus once.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.