Tim Leonard
Most first-time buyers know the path to homeownership is unlikely to be plain sailing. But when a scheme that is specifically designed to help home-buying dreams become a reality can work against rather than for you, it’s a particularly confusing position to be in.
Yet that’s what’s recently been happening to some who have faithfully saved into a Help to Buy ISA – a government initiative that gives people saving a deposit for their first home a 25% bonus on top of the money they put aside.
It’s a generous offer and one that has helped more than half a million people buy their first home since its launch seven years ago.
Although it has not been possible to open a Help to Buy ISA since November 2019, there are still over 2 million people that hold an account which can be paid into until November 2029 and through which the bonus can be claimed up until a year later.
The Help to Buy ISA headache
However, the problem facing many right now is finding a suitable property that’s below the £250,000 price limit – or £450,000 for homes in London – that buyers must stick to if they are to be eligible for the bonus.
According to Laura Suter, head of personal finance at investment platform AJ Bell, this is one of the reasons why the number of people using their Help to Buy ISA to buy a property is significantly down this year compared to last, and looks set to drop to its lowest level since 2017.
“There are lots of factors that are playing into this trend, with recent worries about a property market crash potentially playing a part,” Suter explains. “However, the big factor will be the combination of rising house prices and the property limit for Help to Buy ISAs staying at £250,000 (or £450,000 in London) since they launched in December 2015. It means many people will be priced out of using the Help to Buy ISA because the property they want to buy is worth more than this.”
How could the government help?
Recent analysis by another investment platform, Hargreaves Lansdown, shows there are currently only three regions in the UK where an average property costs under £250,000, and that typical prices in London are over £100,000 higher than the cap imposed in the capital, further illustrating the difficulties that Help to Buy ISA holders face.
As Suter points out, one solution would be for the government to increase the Help to Buy ISA house price limits to better reflect the growth in property prices seen in recent years.
“Since the Help to Buy ISA was launched the average house price has risen from £205,000 to £296,000, according to the government house price index,” she explains. “If the Help to Buy property limit had risen in line with average UK property prices it would be £360,000 today.”
However, with no mention of Help to Buy ISAs in the Autumn Statement, if this is to happen, it seems it won’t be any time soon.
What can Help to Buy ISA holders do?
For those Help to Buy ISA savers who are in a position to buy now but can’t find a property within the scheme limits, one option is to withdraw the money they’ve saved in the ISA but forgo the government bonus.
However, the problem with this, as Suter points out, is the bonus is money that they would have likely been banking on. “This will leave a shortfall in buyers’ budgets that they will need to fill,” she adds. “If someone had saved £10,000 in their Help to Buy ISA they would have been in line for a £2,500 government bonus that they will need to find elsewhere.”
The Lifetime ISA alternative
For those looking to buy outside of London, another potential alternative is to transfer the funds from their Help to Buy ISA to a Lifetime ISA, or LISA, another government scheme which offers the same 25% bonus but can be used to buy a property worth up to £450,000 anywhere in the UK, and not just in the capital.
Other advantages of Lifetime ISAs include allowing higher contributions of £4,000 a year (until you’re 50) compared with £2,400 a year into a Help to Buy ISA, and the potential to earn a bigger overall bonus of £32,000 compared with £3,000. With a Lifetime ISA, bonuses are also added to your account each month, as opposed to a Help to Buy ISA where the extra 25% only becomes payable once you’ve actually bought a home, with the funds being released on completion.
But there are things Help to Buy ISA savers need to be aware of before switching to a Lifetime ISA. These include having to be between the age of 18 and 40 to open a Lifetime ISA, and having to wait at least a year from the day of opening your LISA before it can be used to buy a home.
Another consideration if you have a sizeable Help to Buy ISA is that it’s only possible to transfer £4,000 each tax year into a Lifetime ISA. This will also count towards your annual ISA allowance, which is £20,000 for the 2022/23 tax year.
“If you have the maximum possible of £12,000 in the Help to Buy ISA it will take a while to switch it all,” says Sarah Coles, senior personal finance analyst at Hargreaves Lansdown. “And if you want to keep building a deposit in the interim, you’ll need to find a new home for it until you have the allowance available.”
Are LISAs the nicer option?
Given how far and fast property prices have been growing, it’s also worth considering that the £450,000 Lifetime ISA house price limit will still be too low for some buyers. As with Help to Buy ISAs, the Lifetime ISA cap hasn’t changed since LISAs were launched in April 2017, despite house prices rising 29% in the period since.
“If the Lifetime ISA limit had increased in line with this it would sit at £580,500 today – more than £130,000 higher,” says Suter. “Many aspiring homebuyers will have signed up to the accounts years ago, not realising that it would take so long to get on the property ladder and that they might fall foul of the property limit in the future.”
Suter adds that what makes the situation more galling for first-time buyers who have been priced out of using their Lifetime ISA is that they’ll pay an “onerous” withdrawal penalty and lose not just the bonus but some of their own money too if they take the cash from their accounts. “Anyone who exceeds the £450,000 limit, even by just £1, will be hit with the 25% exit charge on the Lifetime ISA, as their purchase will no longer be within the rules,” she explains.
“We’d like to see a permanent cut to the penalty for the Lifetime ISA,” adds Coles. “It seems unfair to penalise anyone for trying to do the right thing, but it’s particularly inequitable to do it to people facing hardship or victims of circumstances beyond their control. For self-employed people facing a financial crisis or for buyers forced out of being able to use a LISA by rising house prices, we want to see the penalty reduced to 20% – so you only lose the government bonus.”
Disclaimer: The content of this article doesn’t constitute advice, but acts as guidance and commentary on the mortgage market.
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