How do I know which ISA to open? Will my money be trapped in there? What provider should I go with?
These are certainly the questions that were running through my head.
This blog is aimed at helping first time buyers navigate their way through the ISA maze, and hopefully reaching a solution that works best for you.
So, taking a step back…
In simple terms, the government created these tax-free savings products with the objective of encouraging young people to save and getting them onto the property ladder. By doing so, the government offers to top up your savings that you deposit into the ISA with a 25% bonus of the total amount when you want to buy your first house.
The two ISAs designed for this kind of saving have many benefits, but they also have limitations. It’s important that you understand the differences between your two options.
Help to buy ISA
With the government offering a maximum bonus of £3,000 on your savings (capped at £1,000 annually), the Help to Buy ISA is an easy and tax-free way to save, particularly if you’re a novice when it comes to investing.
You can put up to £200 in your Help to Buy ISA each month, however when you first open your account you can pay a maximum initial deposit of £1,200 to help you get started. If you can, it’s worth paying the full amount as it will get you closer to the maximum bonus more quickly.
Putting it even more simply, the government will give you £50 for every £200 you save. Meaning you would have to save a total of £12,000 over 4 years and 6 months to receive the maximum £3,000 bonus. This assumes that you pay the full £1,200 deposit and £200 every month.
Apologies if this sounds mind numbingly obvious, but as someone who isn’t naturally a maths person, I always appreciate it when something is broken down into its simplest form!
Looking to buy a house with someone else? If they also have a Help to Buy ISA then you will both receive the 25% bonus. That’s potentially a free £6,000 bonus that you can have between you.
The Help to Buy option is only available as a cash ISA, this means that you have a variable interest rate from your provider. It also means that you don’t have to worry about your savings fluctuating in value depending on the underlying investment performance. Later on, you will see that a Lifetime ISA gives you the choice of holding your savings in cash or stocks & shares.
If you like the sound of the Help to Buy ISA then you’ll need to be quick, the scheme is only open to new customers until 30th November 2019. You’ll be able to save into your Help to Buy ISA until 30th November 2029 should you open one before the closing date.
Make sure you research the right provider for you, as they will all offer a slightly different interest rate and have different terms and conditions.
Lifetime ISA (LISA)
A newer addition to the ISA family, the LISA was introduced in April 2017 and arguably has more restrictions than the Help to Buy option. Although the rewards can be much greater. Perhaps this is why the Help to Buy scheme is being replaced in favour of the LISA – but that’s just my own speculation!
Perhaps the most attractive part of the LISA is that you could potentially earn an impressive £32,000 bonus. This assumes that you have contributed the maximum amount over 32 years.
Lifetime ISAs allow people to save for their first home or retirement in the same pot – with the additional 25% bonus from the government. This means that you can only withdraw the money from your LISA and access your bonus for those two reasons. Withdrawing money for any other reason will incur a hefty 25% charge from your savings.
Savers can put up to £4,000 in their LISA each year, meaning the bonus is capped at £1,000 annually. Unlike the £200 monthly limit with Help to Buy, you can pay lump sums into your LISA. This is what attracted me personally to the scheme.
Hopefully not confusing things further, there are two types of LISA to choose from: Cash or Stocks & Shares LISA. By investing your savings via the Stocks & Shares option, you have the potential to make a greater return on the money you initially invested.
But be warned – like any stocks and shares investment, the value can go up and down. You could end up with less than you started with.
Again, everyone is different and you will have to decide what is realistic for you and what you are comfortable with.
NEXT STEPS
Whichever ISA you decide to go with is completely your choice.
Some like the fact that with the Help to Buy ISA you can withdraw your savings at any time without paying a hefty fee, whilst others are attracted to the LISA because of the potentially higher bonus and investment growth.
The key at this stage, whether you are thinking of buying your first house or not, is to open up a savings account and contribute to it regularly. This will help enormously when you come to making these bigger decisions in your life.
