Robert Johnstone investigates which ISA performs better for those saving towards a deposit for a house.
One of the surprise announcements of the last budget was that another new type of ISA will be available from next year.
The ‘Lifetime ISA’ which is to be launched in 2017, will only be available to those under the age of 40 and its main purpose is to categorically help younger people to save towards homeownership. But wasn’t that what the Help to Buy ISA that was announced last year supposed to be for we hear you ask.
At first glance the two ISA’s do sound pretty similar, but there are some differences and there are pros and cons with each of them. In this article we provide an overview of how both ISA’s will work and weigh up the advantages and disadvantages of each.
The Lifetime ISA – How it works
For every £4 invested the Government will give you £1 and the maximum amount that can be invested into the ISA each year is £4,000, generating a generous £1,000 bonus.
The bonus is definitely generous.
It will be difficult to beat the ‘free money’ on offer via the stock market.
Even if someone was to take advantage of the extended ISA allowance next year, investing the full £20,000 into a stocks and shares ISA, a return of 5% would need to be achieved to match the bonus.
The Lifetime ISA allows savers to choose either cash or stocks and shares. So it makes sense, even for those who prefer stocks and shares, to mix and match, holding up to £4,000 in the Lifetime ISA and from next year up to £16,000 in a stocks and shares ISA, to take full advantage of the generous bonus.
The Help to Buy ISA is purely a cash product.
There is a 5% early exit fee if you do not use the ISA to fund your retirement or purchase your first home. The bonus will also be lost.
The Lifetime ISA is not as flexible as it seems, particularly if you have other goals, or if you are already on the housing ladder.
It is also bad luck for those already age 40 or over by April 2017.
Help to Buy ISA – How it works
First time buyers who use the ISA to save for their first home will be handed £50 for every £200 they save. This is the maximum that can be saved each month.
The first £200 monthly payment can be boosted by an initial deposit of £1,000. The bonus from the Government on the £1,000 will be £250. Therefore in total the maximum bonus in year one is £850.
The overall maximum amount the Government will contribute is £3,000. Therefore a total of £12,000 needs to be saved in the ISA to achieve this. It would take 55 months (just over 4 and a half years) for a first time buyer to save up the maximum £12,000.
If you change your mind and do not buy a property you can still keep the interest rate given, the best of which pay a rate of 4%.
There are no exit fees.
As with the Lifetime ISA, the bonus on offer is generous.
There are no stocks and shares version of the Help to Buy ISA, instead it is purely cash account.
Which ISA comes out on top?
If you are saving towards a deposit for a home, the bonus on offer is slightly higher on the Lifetime ISA at £1,000 a year compared with the £850 a year that the Help to Buy ISA can generate.
If you are using the Lifetime ISA towards your first home, a price cap of £450,000 will apply. A Help to Buy ISA however can only be used towards a property worth up to £250,000 (or £450,000 in London).
It does remain to be seen whether the limits on either the Help to Buy ISA or the Lifetime ISA will be increased over time to account for property price inflation. But those who do expect house prices to continue to rise will probably be attracted towards the Lifetime ISA, due to the fact that they can choose the stocks and shares version which offers the chance of higher returns than cash. There are of course no guarantees.