Missed the Help to Buy deadline? - Not to worry
First time buyers who wanted to take advantage of the generous Government bonus offered by the Help to Buy (H2B) ISA, may have missed that particular boat, as the product was withdrawn from sale on 30th November last year.
But the good news is that there could be an alternative option.
Anyone who managed to open a H2B ISA account before the deadline can continue contributing to it until 30 November 2029. The only other deadline is that the Government bonus, paid when you use your account to buy your first home, must be claimed by 1 December 2030 or you'll lose it.
The H2B ISA was introduced on 1st December 2015 to provide “direct government support” to help “generation rent” get onto the housing ladder. And with a generous 25% bonus on the amount saved, which is added at the point of completion of the property, many first-time buyers have taken advantage.
So, should future first-time buyers be disappointed that they missed the Help to Buy opportunity?
The good news is that the launch of the Lifetime ISA (LISA) in April 2017, has really superseded the Help to Buy ISA and, in many ways, the LISA is actually a far better product.
Help to Buy ISA versus Lifetime ISA
As the name suggests, the Help to Buy ISA is a savings account designed to help first time buyers – so the bonus is paid on the completion of the purchase of your first home.
The Lifetime ISA has two objectives - to save towards the purchase of your first home and/or to help boost your retirement income.
Both of these ISAs offer an excellent Government bonus of 25% on each deposit made, but the maximum bonus available on the H2B ISA is £3,000 compared to as much as £33,000 on the LISA, as you can receive the bonus on up to £4,000 deposited per annum from the age of 18 to 49.
In fact, as the Help to Buy ISA is a cash ISA and the Lifetime ISA is a stand-alone ISA type, you can contribute to both in the same tax year without falling foul of the ISA rules.
However, crucially, you can only use the 25% bonus from one of these vehicles for the purchase of your first home.If you hold both accounts and use the H2B ISA for your first home, you’ll have to keep the Lifetime ISA until at least the age of 60 – or suffer a steep penalty for earlier access.
If you are just looking to save towards the purchase of your first home, arguably the LISA is still the better bet. You can deposit more each year (£4,000 per annum as opposed to £200 per month) and the 25% bonus is added to the Lifetime ISA the month following each deposit that is made, so that the deposit and the bonus can earn interest until the account is cashed in. This compounded interest could make a big difference over time.
The bonus on the H2B ISA is simply paid on the completion of the property and is based on the amount in the account.
With the LISA, the price of the property you are able to buy can be up to £450,000 regardless of where in the country it is, as opposed to the H2B ISA, which restricts the price of any property outside London to £250,000.
However, you have to hold the LISA for at least 12 months before you can use the bonus, so it would not be appropriate for those looking to buy their first home sooner than this.
Some H2B ISAs are paying rates that are far more competitive than the LISA, or indeed standard cash ISAs or savings accounts. For example Buckinghamshire Building Society is paying 2.50% AER. But, there are only five LISAs to choose from – the best being available via a financial app called Moneybox, paying 1.40% tax free/AER.
What if you missed the Help to Buy ISA deadline?
So, if you’ve missed the window of opportunity to buy a Help to Buy ISA, all is not lost. As long as you are aged 18-39 you can take advantage of the Lifetime ISA instead.
But remember to remind yourself of the rules, so that you don’t open something that isn’t fit for purpose as there is a penalty for those who make a withdrawal from their LISA before the age of 60, if the funds are not to be used to purchase their first home.
With the H2B ISA you can choose to cash it in at any stage and if the proceeds are not for the purpose of a first home purchase, you’ll simply not receive the bonus – but any interest earned will be yours.
For the LISA, as the bonus is added each month following any deposit, the penalty for erroneous encashment is 25% - which sounds fair considering that the Government has given you a 25% bonus.
But, of course, it’s not as simple as that and the penalty means that not only all of your government bonus will be clawed back, but 6.25% of the money you put in too.
For example, if you were to deposit the maximum £4,000 into the LISA, the Government will top it up by £1,000. If you needed to withdraw the full £5,000 you would have to pay a penalty of 25% on £5,000, which is £1,250. So, assuming that no interest has been earned, you would receive back just £3,750 of your original £4,000 deposit.
Recent figures obtained by Royal London, using a Freedom of Information (FOI) request, have shown that young savers have already paid over £9m in fines for taking money out of their LISA erroneously - £4.35m in 2017-18 and £4.69m in the first seven months of 2018-19.
Steve Webb, director of policy at Royal London, said: "A Lifetime ISA can be attractive for those who are clear about their plans to put down a deposit on a house and who are confident that they won’t need the money for any other reason".
"But these figures are a stark reminder that things can change. People who change their plans after saving in a Lisa are finding that not only do they have to pay back the government top-up but they face a penalty charge as well."
"This leaves them with less money than they started with. It is hard to see why the government should fine people whose only ‘crime’ was to put money aside in the hope of buying a home and then see their circumstances change."
Webb added “The Lisa would be a much more attractive product if this penalty charge was abolished.”
The LISA is still a really valuable account to consider for younger savers who are planning on buying their first home, or indeed saving for their retirement – but it’s important to make sure you don’t fall foul of the rules or it could end up being a costly mistake.