Saving for a first home deposit is one of the biggest financial challenges facing young people in the UK. To help, the government introduced two tax-free savings products with generous bonuses: the Help to Buy ISA and the Lifetime ISA (LISA). Both offer a 25% government bonus on savings used towards a first property purchase, but they work quite differently and have distinct rules.
The Help to Buy ISA closed to new accounts on 30 November 2019, though existing holders could continue saving until November 2029 and claim their bonus until November 2030. The Lifetime ISA, launched in April 2017, remains open and is now the primary savings vehicle for first-time buyers looking to benefit from a government bonus.
How the Help to Buy ISA Worked
The Help to Buy ISA was a simple cash savings account available from banks and building societies across the UK. Savers could deposit up to £200 per month (with an initial lump sum of up to £1,200 when opening the account). The government added a 25% bonus when the savings were used towards a first home purchase, up to a maximum bonus of £3,000 on £12,000 of savings.
The property had to be priced at £250,000 or less (£450,000 in London) to qualify for the bonus. One important detail that caught many savers off guard was the timing of the bonus payment. Unlike the LISA, the Help to Buy ISA bonus was not paid directly into the savings account. Instead, it was claimed through your solicitor during the conveyancing process and applied at completion. This meant the bonus could not be used as part of your exchange deposit, which typically needs to be paid before completion.
Interest rates on Help to Buy ISAs varied between providers but were generally competitive compared to standard cash ISAs. The accounts were available to all UK residents aged 16 or over who were first-time buyers, and couples buying together could each have their own Help to Buy ISA, effectively doubling the bonus to £6,000.
How the Lifetime ISA Works
The Lifetime ISA is a more flexible product that can be used either towards a first home purchase or for retirement savings after age 60. Available to anyone aged 18 to 39, the LISA allows you to save up to £4,000 per year and receive a 25% government bonus, meaning a maximum annual bonus of £1,000. The bonus is paid monthly, directly into your LISA account.
For property purchases, the home must cost £450,000 or less, and you must be a first-time buyer. The LISA must have been open for at least 12 months before you can use it to buy a property, so it is important to open one early even if you can only put in a small amount initially.
LISAs come in two forms: cash LISAs (similar to a savings account) and stocks and shares LISAs (invested in funds). Cash LISAs offer the security of a guaranteed return plus the bonus, while stocks and shares LISAs have the potential for higher growth over longer time horizons but carry investment risk.
The key advantage of the LISA over the Help to Buy ISA is the higher annual contribution limit (£4,000 vs £2,400 per year) and the fact that the bonus is paid directly into the account, making it available as part of your deposit at exchange. Over several years of saving, the total bonus available through a LISA is significantly higher.
Important Rules and Penalties
The most significant drawback of the Lifetime ISA is the withdrawal penalty. If you withdraw money for any purpose other than buying your first home or retirement after 60, you face a 25% withdrawal charge. This effectively means you lose your government bonus plus a portion of your original savings. For example, if you have £5,000 in your LISA (£4,000 savings plus £1,000 bonus), withdrawing the full amount for a non-qualifying purpose would cost you £1,250 in penalties, leaving you with just £3,750, which is less than you put in.
This penalty means you should only open a LISA if you are reasonably confident you will use the funds for a property purchase or retirement. If your circumstances are uncertain and you may need access to the money, a standard savings account or cash ISA would be more appropriate despite the lack of a government bonus.
It is also worth noting that you cannot use both a Help to Buy ISA bonus and a LISA bonus for the same property purchase. If you hold both products, you need to choose which bonus to claim. In most cases, the LISA will offer a larger bonus due to the higher contribution limit.
For those who held a Help to Buy ISA, you can transfer the balance into a LISA without it counting towards your annual LISA contribution limit, though you should check the specific terms with your provider. The deadline to claim a Help to Buy ISA bonus is 1 December 2030.
For full details on the Lifetime ISA, visit the gov.uk LISA page. If you are an existing Help to Buy equity loan holder looking to manage your repayments, use our Help to Buy Calculator to plan ahead.