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Help to Buy Isas vs lifetime Isas: which will get you on the property ladder first?
Help to Buy Isa savers are able to buy a home two years earlier than those who don't have an account, with average savings that take just 15 months to accumulate, the latest figures from the Treasury suggest.
The median age for a first-time buyer using a Help to Buy Isa is 28 years old, while the national average is 30.
By comparison, Skipton Building Society figures show that lifetime Isa savers take an average of 16 months to buy their first property, at an average age of 31.
Anyone who doesn't already have a Help to Buy Isa only has the option of opening a lifetime Isa, as the accounts closed to new customers on 30 November 2019. But existing savers might want to know if it's worth transferring to a lifetime Isa instead.
Here, Which? reveals how Help to Buy Isas have been helping savers buy their first home and how they compare with the newer lifetime Isa savings options.
Who are Help to Buy Isas helping?
Now closed to new savers, just over 304,000 property purchases have been supported by the Help to Buy Isa scheme between 31 December 2015 and 31 December 2019.
Savers received average government bonuses of £986, paid on savings of £3,944. Due to the account's deposit restrictions, it would take a minimum of 15 months to save this sum (not taking into account any interest you may earn).
Help to Buy Isas are being used most in North West England and Yorkshire & the Humber; both regions make up 21% of all Help to Buy Isa bonuses that have been paid out.
The popularity may be due to lower property prices in these areas. According to Land Registry data, December 2015 saw first-time buyers in Yorkshire & the Humber paying an average of £124,964 for their first home, rising to £142,635 by December 2019.
In the North West, first-time buyers paid an average of £120,678 in December 2015. This was up to £139,945 by December 2019.
Considering that fact that both areas are considerably cheaper than the £173,711 average price paid out by Help to Buy Isa holders - a figure which is already far below the national £193,384 average first-time buyer house price - it could be that it is easier to buy your first home in these areas anyway.
How much deposit does it cover?
If you were to buy the average Help to Buy Isa home at £173,711, bear in mind that the average Isa savings of £3,944 would only make up part of your deposit.
On a £173,711 property, the 5% minimum deposit you would require is £8,686.
As the Help to Buy bonus is only paid on completion (so can't form part of your deposit), you'd need to have extra savings of £4,742 to make up the difference - more than what's saved in the Help to Buy Isa.
- Find out more:Help to Buy Isas explained
Could lifetime Isas help more first-time buyers?
While it takes the average Help to Buy Isa saver 15 months to land their first home, it takes lifetime Isa savers an average of 16 months to get on the property ladder.
That's according to figures released in February 2020 by Skipton Building Society, which was the first provider to offer a cash lifetime Isa and has more than 120,000 savers.
Those buying a home with lifetime Isa savings also tend to be older - aged 31, compared with the Help to Buy Isa's average of 28.
This could be because the product is being used to help buy more-expensive properties. According to Skipton, the average property value that its savers were purchasing came in at £193,224 - a figure that's much closer to the national average for a first-time-buyer home.
For a 5% deposit on a property with that value, you'd need to have saved £9,662. It's possible to have saved this sum entirely in a lifetime Isa in 16 months, but it wouldn't be possible with a Help to Buy Isa.
If a lifetime Isa saver used the maximum deposits available over this time (£4,000 in each tax year) they could have earned a maximum of £2,000 in government bonuses. That gives a savings total of £10,000.
A Help to Buy Isa saver could only deposit up to £4,400 in the same amount of time, earning a government bonus of £1,100 - a total of £5,500.
Withdrawal penalty drawback
Perhaps the most important thing to consider when committing to a lifetime Isa is whether you can avoid making any withdrawals.
Under normal circumstances, 25% is charged on any withdrawals used for anything other than buying your first home, or in retirement after the age of 60. This not only takes back the government bonus, but would also take away 6.25% of your own cash.
However, between 6 March 2020 and 5 April 2021, the government is reducing the withdrawal penalty to 20%. This is to help savers who need to access their cash due to the coronavirus crisis and has the effect of only removing the government bonus.
There is no charge or restriction on withdrawing cash from a Help to Buy Isa.
- Find out more:lifetime Isas
Help to Buy Isas vs lifetime Isas
While Help to Buy Isas are now closed to new customers, savers who already have an account have until 1 December 2030 to put the cash towards their first home, but might be wondering whether their savings would be better off in a lifetime Isa instead.
The table below sums up the main similarities and differences between the two accounts.
| Help to Buy Isa | Lifetime Isa | |
| What kind of Isa is it? | Cash Isa. | Cash Isa or stocks and shares Isas. |
| Is it open to new savers? | No - it closed to new savers on 30 November 2019. Existing savers have until 1 December 2030 to buy their first home and receive the bonus. | Yes - anyone aged between 18 and 39 can open a lifetime Isa. You can't have owned a home before if you want to use the money to buy a property. |
| How much can I pay in each year? | £3,600 in the first year; £2,400 each year after that. | £4,000 a year. |
| Can I deposit a lump sum? | You can deposit an initial lump sum of £1,200 when you first open the account, but after that, you're restricted to £200 a month. | Yes, up to £4,000. |
| What's the maximum bonus I can receive? | £3,000, paid when you save £12,000. | £1,000 a year, if you deposit £4,000. Savers can't pay into the account after the age of 50, meaning the bonus payments will also stop. |
| When is the bonus paid? | Upon completion of buying a property. | Monthly, into your account. |
| What's the maximum property price? | £250,000 in most areas of the UK; £450,000 in London. | £450,000 anywhere in the UK. |
Other ways to save for your first home
Saving into Help to Buy Isas and lifetime Isas aren't the only ways to build up a deposit for your first home, and it could be that neither option is quite right for you.
Standard savings accounts could be an option. The top rate on an instant-access savings account is currently 1.2% AER - a similar rate to some of the cash lifetime Isas, but without the government bonus. An instant-access account does offer greater flexibility - most allow you to withdraw and add cash as often as you like, without any deposit restrictions.
Alternatively, if you know you won't be buying a home for several years and have a lump sum ready to put away, a fixed-term account is worth considering. Both Help to Buy Isas and lifetime Isas are variable-rate products, meaning the interest rate could change at any time, but fixed-term account rates must maintain the advertised interest rate.
The top rate on a five-year account is currently 1.85% AER, but in many cases you won't be able to access your cash before the term is up, or add any extra savings.
However, be aware that, if you're saving large sums of money in a savings account rather than an Isa, you may have to pay tax on the interest you earn if it exceeds your personal savings allowance.
- Find out more:how to save for a mortgage deposit
