November is here – and we’re preparing to say bye-bye to Help to Buy!
Well, not entirely. The Help to Buy policy consists of two parts. The equity loan component isn’t scheduled to end until March 2023. Before that, the scheme will be significantly streamlined to help first-time buyers only (er, I thought that’s what it was mean’t for?)
And whoever wins the election in November could even decide to extend the scheme. Labour’s 2017 manifesto pledged to keep the life support switched on until 2027! That’s surprising, given that home-builders (and their shareholders) are widely seen as the biggest winners from generous taxpayer subsidies Help to Buy provides – though Labour would argue that its plans to build more homes will redress the balance. Nevertheless, Help to Buy is, in essence, still the methedrone of the housing market…
But what we’re talking about today is the Help to Buy ISA, which is closing to new savers on the 30 November. It’s often mixed up with the equity loan but it’s actually quite different.
It’s a savings product and more specifically (yet another) offshoot of the Isa family. It’s part of your £20,000 tax-free Isa allowance. So you get to keep all the cash you save AND the interest you earn.
Isas are not particularly mind-blowing for young people today. Recent governments seem to be *obssessed* with Isas, conjuring up more and more of them, but various personal allowances have also grown, allowing most of us to hold onto more of our income and savings. Combine that with rubbish interest rates – the best deal you can get on a Help to Buy Isa now is 2.5 per cent – and your reaction might be: so what?
The real draw here is a government bonus worth up to £3000 if you save the maximum amount into the product (£12,000). If you’re all coupled up, both love birds can get a H2B Isa and net a combined bonus of £6000. The bonus you get is worth 25p for every £1 you save, and you can put in up to £1200 as an initial deposit, earning you an initial bumper bonus of £300. The maximum amount you’re allowed to save thereafter each month is £200.
It’s fair to say the Help to Buy Isa isn’t going to radically transform your saving prospects anytime soon. Yes, the bonus is tasty but it’s tied to how much you can save. So the people who benefit most are those with above-average incomes, reduced housing/living costs because they live at home or direct financial support from their parents (some lucky sods have all three).
That’s particularly true when you consider the initial sum needed in order to qualify for the maximum bonus – £1200. That opportunity only comes once and if you can’t meet it, you’ll never be able to make up the difference due to monthly savings restrictions thereafter. So the Help to Buy Isa is a bit like one of those strong-man tests you get at funfairs – you’ll never hit the top bonus if you don’t have that financial muscle from the outset.
Sting in the tail
An even bigger downside is that the bonus itself isn’t actually available until AFTER contracts have been exchanged. So you can’t use it as part of your home deposit. At best, it’s felt irritating and strange for first-time buyers who can only use the bonus towards their initial mortgage or home-moving costs. At worst, it’s been a terrible shock and a real threat to people who were very dependent on this money to count towards their deposit.
On the one hand, I can understand why this restriction was in place. The Help to Buy Isa can be opened and closed at any time without penalty. But that means people could walk off into the sunset with taxpayer-funded bonuses that go nowhere near buying a house: plainly unfair. But the restriction does, in my mind, render the Help to Buy Isa a little bit pointless. If you can’t actually use it towards your deposit, what’s the point?
Nor does this product address the underlying problems of the housing market. That requires huge reform of planning law, the freeing up of land all over the country and possibly a huge shake-up in taxation too. If anything, this product just encourages more young people to pile into housing, inflating prices and lifting up the drawbridge for those less fortunate.
Nevertheless, I still advocate taking out a Help to Buy Isa for three reasons. Here they are…
1. There are worse places to stash your cash
Opening a Help to Buy Isa is pretty low-risk and straightforward in the grand scheme of financial decisions you could make. You can earn up to 2.5 per cent in interest tax-free and you can take out your money (penalty-free) whenever you want.
2. You can keep your options open
It’s better to save something than nothing. Even if you’re not sure about buying property now, you might change your mind in the future. If you do, you’ll be glad that you planned ahead.
There is a new product which is effectively replacing the Help to Buy Isa called the Lifetime Isa. But you’re allowed to have both or you could make the switch further down the line. The Lifetime Isa allows you to save more – up to £4000 a year – and earn a bigger bonus (£1000). If you’re feeling brave and clearly saving for longer than five years, you can also put your LISA into stocks and shares to try and get a better return. But the LISA is a much bigger commitment, charging a 25 per cent penalty on any amount withdrawn (partly because the bonus is paid monthly).
So you could open a Help to Buy Isa now if you’re not sure and only able to save up to £2400 a year, THEN transfer to the LISA if you start earning more and feel ready to commit to the home-buying dream. Just be aware that doing so will eat into your annual Isa allowance of £20,000 – but the move will still probably be worth it.
3. You can take advantage of expert advice in-branch
LISAs haven’t exactly been embraced by the financial industry, and that’s partly because the product is more complex than the Help to Buy Isa. Currently, only a handful of building societies offer cash versions of the LISA and only Nottingham Building Society offers any advice in-branch about the product. By contrast, there are several banks/building societies happy not only to sell the Help to Buy Isa but offer you expert advice about what it entails. Recent research from GlobalData shows half of gen Z and a third of millennials would appreciate this. LISA interest rates are also not much cop: the best deal is offered by Moneybox at 1.4 per cent. But they have steadily climbed from 0.5 per cent as more providers have entered the market.
In due course, LISAs could (and should) become more competitive as the Help to Buy Isa closes to new savers. Until then, you can have your savings cake and eat it by opening a Help to Buy Isa, regardless of your long-term plans. But get your skates on – and if possible, put as much as you can towards that initial deposit to get your full bonus from the government.
What do you think? Do you have a Help to Buy Isa? Thinking of opening one? Leave a comment or tweet me – @ionayoungmoney.