Here’s help to decide which of two Isas is the best to buy into

There are two Isas to help first-time buyers get on the property ladder … but which one is right for you? Photograph: REX/Alex Segre

The government is hailing the success of the help-to-buy Isa, with figures released today which show that a million accounts have been opened by first-time buyers since December 2015, with £1.8bn saved towards buying a home.

It’s not difficult to see why they have been popular – the government gives a 25% bonus on savings of up to £12,000, worth £3,000 for an individual or £6,000 for a couple. To put it another way, a couple who save £24,000 between them for a deposit are given a further £6,000 by the government. The money has to be used to buy a home up to the value of £250,000 outside London, or up to £450,000 in the capital.

Savers can only access the bonus by instructing a solicitor or conveyancer during the house-buying process, with the bonus added to the mortgage and funds used to pay for a property transaction.

On top of the government bonus, savers also pick up whatever interest is paid by the bank or building society where they open the Isa. Currently, the help-to-buy Isa paying the highest rate is from Barclays at 2.27%, while most of the other major banks and building societies pay around 2%. That alone makes help-to-buy Isas attractive, as the best conventional cash Isas from the big banks pay only 0.5%-1%.

Sounds good, yes? But unusually in recent years savers actually have a dilemma: the help-to-buy Isa is good, but the Lifetime Isa, launched this year, is also good for those putting money away for a home. It also pays a 25% government bonus, but is worth up to £32,000, so you might think this is a far better deal. But of course it’s not that simple. So which is better?

Help-to-buy Isa – pros and cons

Savers can put up to £1,200 in during the first month, then a maximum of £200 a month after that. You can save less, but it has to amount to a minimum of £1,600 to qualify for a bonus (which for that amount would be £400).

You need to save regularly – if you go for the maximum of £200 a month, but then miss a month, you can’t make up the difference the following month.

Currently, the scheme is set up so that you can open accounts until December 2019, and it will pay out bonuses on savings until December 2030 – so you have up to 13 more years of monthly saving for that dream first home. By that time of course, house prices may have risen another million percent, rather cancelling out your attempt to save.

The age restrictions aren’t as bad as the Lifetime Isa, with anyone aged over 16 able to open a help-to-buy Isa. Crucially, you have to be a first-time buyer – which means you can’t have owned or part-owned a property either in the UK or elsewhere at any time in the past.

If you decide not to buy a home you can cash in the Isa at any time. You won’t get the government bonus but will still receive the interest of up to 2.27% a year, which still makes it better value than the vast majority of Isas.

You can transfer the money at any time, should you find there are better rates elsewhere, and there is no requirement to stick with the bank or building society you saved with when you come to sort out a mortgage.

Unfortunately, there are some complications around when you can actually access the bonus money. Importantly, you only get it on completion of a home purchase. You don’t get it at the “exchange” stage, where buyers typically put down a 5% or 10% deposit to guarantee the purchase.

Lifetime Isa – pros and cons

Also called the “Lisa”, this lets you save up to £4,000 a year with a government bonus of 25% of everything you save, ie, up to £1,000 a year. The money can be used to buy a first property or be put towards retirement from the age of 60.

The big drawback is that you must open a “Lisa” before you are 40, although you can continue to save and keep pocketing the bonuses until age 50.

Savers, therefore, have the potential to earn a total of £32,000 in bonuses if they pay in the maximum £128,000 over 32 years from age 18. Accounts can be held in cash, or stocks and shares.

However, there is a massive penalty if you wish to make an early withdrawal. If you take out any money before you reach 60 and do not use it to buy a first home, you pay a 25% penalty. For example, say you save £4,000 in a “Lisa” over a year, receiving the £1,000 boost for a total of £5,000. If you cash this in you would have to pay 25% of this total – or £1,250. The penalty applies except in the case of terminal illness or death.

For most people the “Lisa” is better for saving towards a pension rather than for a first-time house buy. It is probably also best for self-employed workers who don’t receive any contributions from a company into a pension scheme.

There is nothing to stop you having both a help-to-buy Isa and a Lifetime Isa, but you can only use the government bonus from one account to buy your first home.

Providers currently offering Lifetime Isas include Skipton building society, Hargreaves Lansdown and The Share Centre, although more providers have promised to come online later in the year.