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Help to buy – ISAs and LISAs

Melanie Tynan – Financial Capability Project Manager

 

House prices continue to rise in many parts of the UK with cities like Manchester recording increases of 6.6% and higher in the last year, according to the latest Hometrack house price index*.

This can make it seem harder than ever for first-time buyers to get a foot on the property ladder but there are a surprising number of schemes around to help. These include ISAs, which are specifically designed to help would-be homeowners save for a deposit and which are available wherever your client lives in the UK. In addition your client may qualify for one of a variety of other schemes from shared ownership to government loans, depending on where they’re looking to buy.

* Hometrack UK cities house price index, November 17

Help to Buy ISAs and Lifetime ISAs

If your client is saving towards their first home, opening a Help to Buy ISA (HISA) or Lifetime ISA (LISA) could be a good move. This is because they not only earn tax-free interest on savings (or income on investments) but the schemes also both pay a generous government bonus of 25% on the amount saved, helping your client build up a larger deposit2.

However, there are important differences between the two.

  Help to Buy  ISA Lifetime ISA
Who can open one? First-time buyers aged 16+3 Anyone aged 18-394
Maximum amount they can save £200 a month apart from the first month when they can save £1,200.5 £4,000 a year4
Maximum bonus £3,000 in total5 £1,000 a year until your client turns 502
Can they invest lump sums? Monthly savings only6 Yes2
Maximum price of property they can buy £250,000 (£450,000 in London)3 £450,0004
When is the bonus paid? Between exchange and  completion of buying a home5 Annually in the 2017/18 tax year but monthly thereafter2
Cash savings only? Yes5 Cash, stocks and shares or a combination of the two4
When can they use the money to buy a house? Anytime, but the minimum bonus paid is £400. They must save at least £1,600 to receive this.6 After they’ve had the account for 12 months2
Can they get interest/investment growth on the bonus? No. The bonus is paid at the point the first home is purchased – therefore it is not possible to earn interest on the bonus.6 Yes. Savers can invest the bonus in the same way as their other ISA savings from the time it’s added.2
What if they don’t buy a property? Savers won’t qualify for the bonus. Providers are also free to apply normal ISA withdrawal rules to the account7

Apart from in the 2017/18 tax year there is a 25% withdrawal charge on the full amount they take out (unless they’re 60 or older, or have a terminal illness).

This means they could get back less than they paid in.2

Counts towards annual ISA allowance? Yes but clients should speak to an ISA manager to explore their options.8 Yes4
Deadline to apply? Must apply by December 2019 and can continue to pay in until 30 November 2029.8 No details of a deadline at this stage

The LISA offers the chance of a bigger total bonus but there may be other things your client needs to consider, such as

  • it must be their first house purchase2
  • it must be their main residence (it can’t be used for buy-to-let)8
  • they must meet the age criteria4
  • when they want to buy (they must have a LISA for at least 12 months before they can use the money)2

You should also be aware that if your client inherits a property, even just a small percentage of one, it can be considered a first house purchase (even if they’ve never lived in the property)8.  If this were to happen they couldn’t use the LISA towards their ‘true’ first house purchase without the 25% penalty being applied.

Where to take care

Your client can have a HISA and LISA at the same time but they can only use the bonus from one towards the cost of a property9.  And, if someone took out a LISA this year (2017/2018), then another one next year (2018/2019) but wanted to use both for a deposit in 2018/2019, the second LISA would be hit with the 25% penalty.  You can get round this by transferring the second one into the first so that it’s treated as if the entire fund was paid in 2017/2018, and no penalty applies10.

The 25% penalty can itself be quite confusing – it isn’t simply the removal of the bonus.  The penalty is 25% of the total fund7.

For example, if someone paid £80 into their LISA, they would receive a 25% bonus to take the fund up to £100. When you then apply the 25% penalty, it brings their investment down to £75.

This is obviously less than the initial amount of £80 paid in and is, in fact, a 6.25% penalty on the original investment.

Retirement

Your clients may think about opting out of automatic enrolment to use a LISA for their pension.

By opting out, they could be giving up their employer contribution and may be worse off.  They might choose, of course, to use it in addition to automatic enrolment for additional savings.

Help in England

Below are some of the main schemes in England to help first-time buyers. For more details on these and others, take a look at the government’s Own your Home website .

  • Help to Buy Shared Ownership– you buy a share (25-75%) of the property and pay rent on the rest. You can buy a bigger share at any point and could eventually own 100% of your property.  To qualify you’ll need a household income of less than £80,000 (£90,000 in London)11.
  • Help to Buy Equity Loan– the government lends you up to 20% of the cost of your newly built home (40% in Greater London), so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. You don’t pay interest on the government loan for the first five years.12
  • Starter Homes – this scheme hasn’t launched yet but you can register your interest for it. It will help first-time buyers who are between 23 and 40 years of age buy a new-build with a 20% discount on properties up to £250,000 (£450,000 in London).13

Housing association and council tenants may also be eligible to buy the property they’re living in at a substantial discount.14

Help in Scotland

There are three schemes in Scotland to choose from.

  • Shared equity – you pay the bulk of the cost of the property (at least 60%) and the Scottish government holds the remaining share. There is one scheme for buying an existing home and another specifically for new-builds.15
  • Help to buy – this is available for new-build purchases. You pay at least 85% of the property price and the Scottish government provides the rest. You own the property but if you sell you’ll have to pay back a share of the money to the government.15
  • Shared ownership – designed specifically for those on a low income. You pay for a 25%, 50% or 75% share of the property and the rest is owned by a housing association. You pay an occupancy charge for living in the home.15

Find out more at mygov.scot

Help in Ireland, Northern Ireland and Wales

In the Republic of Ireland the Help to Buy incentive for first-time buyers of new-build properties helps towards a deposit by allowing you to claim a rebate of income tax up to a maximum of €20,000, depending on the value of the home.16

The nidirect.gov.uk website explains the help available in Northern Ireland.  For information in Wales, see the Welsh government website

More help

Sources

1 – Hometrack UK cities house price index, November 17
2 – The new lifetime ISA, Gov.uk, December 2017. A LISA can also be used as a way of saving for retirement. If you’re thinking about a LISA for this it’s worth making sure your client has also looked into whether their workplace pension scheme is a better option.
3 – Helptobuy.gov.uk, Who is eligible? December 2017
4 – Gov.uk, December 2017
5 – Helptobuy.gov.uk, How does it work? December 2017
6 – Help to buy ISA, HM Treasury, December 2017
7 – The new lifetime ISA, HM Treasury, December 2017
8 – Helptobuy.gov.uk, FAQ, December 2017
9 – moneyadviceservice.org.uk, December 2017
10 – moneysavingexpert.com/savings/lifetime-ISAs, January 2018
11 – Helptobuy.gov.uk, Shared Ownership December 2017
12 – Helptobuy.gov.uk, Equity Loan, How does it work? December 2017
13 – New-homes.co.uk, December 2017
14 – Righttobuy.gov.uk, January 2018
15 – mygov.scot, December 2017
16 – Citizensinformation.ie, December 2017

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