Those of you, your children or grandchildren who hold a Help to Buy (H2B) ISA as part of a deposit for your first property may want to review whether it is still fit for purpose, as rising house prices may mean that you can no longer receive the promised 25% bonus from the Government.
The Help to Buy ISA was launched on 1 December 2015 with the aim of helping first-time buyers aged 16 or more, onto the property ladder. You were able to make an initial deposit of up to £1,000, then a maximum of £200 can be saved per month. When you cash it in to buy your first home, the Government will top up the amount saved (plus the interest earned) by 25%, subject to a minimum bonus of £400 and a maximum of £3,000 – so you need a balance of at least £1,600 to earn a bonus at all, and any balance over £12,000 won’t benefit from the bonus – just the interest paid on the account.
But there are other terms and conditions to watch out for, the main one being that the bonus will only be paid if the property being purchased is valued at £250,000 or less (or £450,000 in London). The problem is that this has not been reviewed since launch, yet house prices have been rising sharply.
First time buyers with a Help to Buy ISA looking to buy in many parts of the country could well be unable to receive the Government bonus, as their dream property could be higher than the cap.
At the time the H2B ISA was launched, according to the Office for National Statistics (ONS) the average price paid for a house by a first-time buyer in England and Wales was £180,340 – in February 2022 the price was £240,839, an increase of 34% in just over six years. And while that figure is still below the £250,000 maximum house purchase price that would be eligible for the H2B ISA bonus, it doesn’t tell the whole story.
If you break it down into regions, there are many places in the country where the average first-time buyer house price is now well above £250,000 – for example in Bristol, the figure stands at £302,934 – up by over 40% in the last six years from £215,816. And in East Sussex prices have risen by nearly 42%, from £196,574 to £278,318. But, although house prices have been rising, sometimes substantially over the past six years, the maximum house purchase price you’re able to buy using your H2B ISA bonus has not risen, or even been reviewed.
Why has the price cap not been reviewed?
One of the reasons that there has been no review could be that the product was withdrawn from sale on 30 November 2019, having been replaced, for all intents and purposes, by the Lifetime ISA (LISA). So perhaps it has simply been forgotten.
The LISA also offers the generous 25% Government bonus on each deposit made, but the annual allowance is far more generous at £4,000 per tax year (so a maximum bonus of £1,000 pa), which can be deposited from age 18 until the day before your 50th birthday, so long as you’ve made one contribution before age 40. Depending on when your birthday falls, that could mean a maximum bonus of £33,000 – obliterating the maximum £3,000 bonus on the H2B ISA.
Another enhanced feature of the LISA over the H2B ISA is that the bonus is added the month following each deposit and as a result the bonus, as well as the deposits, can benefit from accrued interest or growth.
And another big difference is that the house price cap is £450,000, regardless of where you are looking to buy in the country.
So, can I switch my H2B ISA into a LISA?
As it’s a similar concept to the H2B ISA, the Lifetime ISA could be a better option for those who are now looking to buy a property for more than £250,000 but less than £450,000.
But there are things that savers need to watch out for, before taking the plunge and switching.
The key drawback of the LISA is that you have to hold the account for at least a year before you are eligible to use the bonus, so you shouldn’t switch if you are looking to buy a house within the next 12 months.
The LISA is less flexible - with the H2B ISA, if you decide not to use the account for a house purchase, you can withdraw it at any time and you’ll receive all accrued interest until that date – you just don’t get the bonus.
With the LISA, if you withdraw from the account before the age of 60 for anything other than your first home, there is a penalty that means not only will you lose the bonus but you’ll also lose around 6.25% of your deposits. Read our article if you want to understand more about how and when the penalty is applied.
One other thing to be aware of is that if you were looking to transfer from the H2B ISA into the LISA, you can only switch £4,000 a year, which is the maximum LISA annual allowance. Unlike a normal ISA transfer, when you transfer from H2B ISA to a LISA it does form part of your annual allowance. So, if your H2B ISA is worth more than £4,000, you can’t switch the whole lot at once – it could take at least a couple years, so if you’re planning to buy within the time it’ll take you to switch the lot, it might not be the right thing to do. While you can actually hold both a H2B ISA and a LISA, crucially you can only use the bonus for a first-time purchase from one of them. If you don’t use the bonus from the LISA for a first-time house purchase, you can keep the account until you are aged 60 and claim the bonus at that stage.
Finally, the H2B ISA is a cash ISA only, which is appropriate for those with a shorter time horizon for needing the money. With the LISA however, you can choose to invest into Stocks and Shares, or cash, so if you have a time horizon of at least five years and are happy to take a higher risk approach, this could be of interest.
Bottom line, these two products are similar but have some very different rules, so think carefully to decide what the best thing to do is.
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