Should I switch my first home fund to the Lifetime ISA?

Dear Iona,

I'm a bit confused about the differences and potential benefits between a Help to Buy ISA and a LISA. I opened a HTB ISA the last week they were available because everyone was telling me I should and have been steadily saving into it ever since. However, I'm now looking at opening a LISA as well, and it seems a much better option than having a HTB ISA. Am I missing something or is a LISA a much better offering? Is there any point having both or should I transfer my HTB into a LISA?

Dear Dom,

The bottom line is – no, you’re not missing something. The Lifetime Isa is a much better product than the Help to Buy Isa if you’re saving for your first home. If the HTB Isa might have been the right product for you at one time, it probably isn’t now.

You reeled off several advantages of the LISA to me, Dom, and you’re correct on all of them. But for the benefit of everyone else, let’s just recap its advantages – you can save more into the LISA  compared to HTB (£4000 vs £2400) and you can get more bang for your buck on your home purchase across the whole UK, as the maximum property value that can be used for the LISA is £450,000 nationwide (it was capped at £250k outside London in the HTB Isa).

You can also get a higher savings rate on LISAs and although the best rate is currently 0.85% from Moneybox, which isn’t spectacular, you can forgive that when you’re getting a guaranteed 25% interest rate from the government each year.

You can forgive low interest rates on the LISA when you’re getting a guaranteed 25% interest rate from the government each year

Possibly the biggest advantage is that the government bonus is paid into the account as you put  money in along the way. This allows the money to grow and avoids the stressful, silly situation seen with the HTB Isa where the bonus is only paid when your house purchase is complete. What’s the point of that? 

The only major downside of the LISA, compared to the HTB Isa, is that normally you would have to pay a 6.25% penalty on any funds you withdraw prior to buying a house, though this exit charge has been reduced during the pandemic so you only forgo the government bonus. That means the LISA is only for those who can really commit to buying their first home and have easy access savings for emergencies housed elsewhere.

But as much as I don’t agree with the exit charge on the LISA, frankly, nobody can save for their first home in a half-hearted, non-committal way and expect to get anywhere these days. You need to need to work out if this is what you really want or do something else with your money, but keeping it in a HTB Isa on the off-chance you may change your mind – and miss out on so much more free money along the way – doesn’t mean a particularly good way to manage things! Fortunately Dom, you sound very focused and determined to achieve your goal, so I think you’re going to manage your savings very well.

Nobody can save for their first home in a half-hearted, non-committal way and expect to get anywhere these days

The only other thing to consider is whether there’s a chance you may buy in the next year. That’s because you cannot use the LISA for a home purchase within a year of opening it. If you have built enough savings in the HTB Isa to take you over the line in the next 12 months, I would stick with it, but if you know that it will take you longer, switching to a LISA is a no-brainer.

You can choose to transfer some or all of your HTB ISA into a Lifetime ISA, as long as you don’t transfer more than your £4,000 annual LISA allowance during a single tax year. Any money you’ve paid into your HTB Isa during this tax year has already been counted towards your overall £20,000 ISA allowance. So transferring it to your Lifetime ISA won’t use up any more of this allowance.

I discuss LISAs in more detail, and why the exit charge should be reassessed, in the Own It! podcast, which you can listen to here and watch here.

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