Help To Buy ISAs coming to a close in November

Since the 2008 recession, the Government has looked at several ways to assist first time buyers onto the housing ladder. One of which was the Help to Buy ISA (H2BISA), launched December 2015. However, they are about to be closed to new applicants from November 30th 2019.

If you, or more appropriately, your children have not opened an account prior to then, your remaining options will be the Lifetime ISA (LISA), which was launched in April 2017 as a broader brush for savings, be that for buying one’s first home or saving for retirement. The Government has elected to focus its efforts through the LISA channel going forward.

The key differences may influence whether or not yuo rush out to secure a H2BISA, or simply elect to use the LISA option.

The LISA

To open a LISA, you must be between ages 18 and 40 when opening the account, whilst also being a UK resident or Crown servant.

Any contributions you make prior to the age of 50, up to £4,000 p/year, will receive a 25% boost from the Government, up to a maximum of £1,000 p/year. For example, if you saved £4,000 p/year for five years, towards your first home lets say, then you would have secured a further £5,000 in contributions from the Government. A couple buying a home together can both utilise this rule to secure a double bonus.

You can contribute up to the full ISA limit each year (currently £20,000), but will not secure any extra bonus for doing so. However, the gains (on a stocks and shares LISA) or interest (on a cash LISA) are not subject to tax, as is the case with a normal ISA.

After 12 months, the money can be used towards buying your first home of up to £450,000 in value. This is to live in, not to rent out, and any mortgage must be on a traditional repayment basis.

If you are interested in using the LISA as a savings vehicle towards retirement, then from age 60, you can also draw it without losing any of the bonus. Equally, you can draw it without penalty at any time if you have been diagnosed with a terminal illness. Assuming the account was opened by an 18 year old saving towards retirement and paying in £4,000 p/year, he/she could secure a maximum bonus from the Government of £32,000 by aged 50.

Were you to draw from the LISA at any other time, then a penalty will be applied. This being the reclaim of the ‘grossed up’ withdrawal. For example. If you put in £1,000, you would get a 25% (£250) bonus added, making £1,250. However, if you withdrew that money say 2 years later, other than for the reasons stated above, the penalty would be 25% of the gross amount, resulting in a penalty of £312.50. So you would only get back £937.50.  Clearly, unless you are saving for one of then intended purposes, a LISA is not attractive.

Help to Buy ISA

The H2BISA gets the same 25% bonus contribution as the LISA but the purchase of the first home is restricted to £250,000 outside of London and £450,000 in London.

The Government will only pay the one off 25% bonus at the time of completion of you buying your first home, which would be claimed for you buy your conveyancer.  The bonus is payable on savings of up to £200 p/month, (though you can kick start your account with an initial one-off contribution of up to £1,200). You will only be eligible to the Government bonus if your account has at least £1,600 in at the time you apply for the bonus. The maximum bonus you can get is £3,000 based upon you having built up the maximum £12,000 in your H2BISA. Assuming you paid the maximum in at every opportunity, it would take you 54 months to get your savings to the £12,000 level. (Remember though, a couple buying together, can each do this).

Summary

As you can see, the LISA offers greater flexibility and the Government bonus is added to your account on an ongoing basis, (not just at point of property purchase), which means you can secure growth/interest on it. However, that does come at the price of a significant penalty should you withdraw for reasons other than the approved reasons noted above.

Karl Lavery