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One-year countdown: is it time to open a Help to Buy ISA?

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Written by: Danielle Levy
23/11/2018
The one-year countdown is approaching for savers looking to set up a Help to Buy ISA.

From 30 November 2019, the Help to Buy ISA will no longer be available for new investors, leaving individuals with a little over a year to set one up.

This type of ISA has been going for almost three years and allows first-time buyers to save up to £200 a month and gain access to a government bonus of 25%. However, the bonus is only paid out after completion so cannot be used towards the initial deposit. Around 1.2 million Help to Buy ISAs have been opened so far.

While the initiative has been helpful for first-time buyers, Sarah Coles, personal finance analyst at online fund broker Hargreaves Lansdown, suggests that savers should think carefully before rushing to open a Help to Buy ISA.

“Last orders are being called for the Help to Buy ISA, because from November next year, you won’t be able to get your hands on one. But as the bell rings and staff check their watches, there’s no need to scramble to get a swift one in before it’s too late, because you may be far better off elsewhere,” Coles explained.

She suggests that the Lifetime ISA (LISA) could represent a sound alternative for some savers.

“For many people it’s a more sensible solution. It offers a bigger allowance, a bigger bonus paid more quickly, and far more options over what to do with your money. In fact, if you already have a Help to Buy ISA, it may even make sense to transfer,” she added.

The LISA launched in April 2017 and is available for those aged between 18 and 39. Savers are able to use the proceeds from the tax-efficient scheme to either buy a first home or to contribute towards retirement, with the government offering a 25% annual bonus on contributions made (which can total £4,000 each year).

Coles notes that 50,000 LISAs have been opened on Hargreaves Lansdown and the platform has already seen hundreds of people use the proceeds of their LISA to buy a property.

To find out more about the benefits of a LISA versus a Help to Buy ISA, check out the table below:

Help to Buy ISA Lifetime ISA
Tax benefits Tax-free Tax-free
Government bonus on contributions 25% 25%
Maximum bonus £3,000 (on the first £12,000) £32,000
Maximum house prices £250,000 (£450,000 in London) £450,000
When is the bonus paid? At house purchase – after the exchange (so it can’t be used for the deposit) Monthly
ISA allowance £1,200 in the first month, and £200 a month thereafter £4,000 a year
When can you make contributions Monthly (up to £200 a month from month 2, which cannot be rolled over) Any time
What can you save/invest in Cash Cash or stocks and shares
What can you do with your ISA once you’ve bought a house Nothing. It closes at this point Continue investing for retirement – withdrawal from age 60
What if you don’t buy a house You withdraw the cash and don’t get a bonus You can continue investing for retirement, or withdraw the cash and pay a penalty

Source: Hargreaves Lansdown

Should you transfer to a LISA?

Transferring an existing Help to Buy ISA into a LISA will provide you with a bigger allowance, a bigger bonus and access to other benefits. However, it’s important to note that any money you transfer will come out of this year’s LISA allowance. Effectively, you can only transfer up to £4,000 a year – and after this point, you won’t be able to make any further contributions for the rest of the year.

Coles adds that if an individual has the maximum amount in a Help to Buy ISA (£8,000), this would stop them from making additional contributions until April 2020. In addition, savers can only benefit from the bonus if they purchase a property 12 months after opening the LISA – if a property is purchased before the individual won’t receive the benefits.

However, for savers with only a small amount saved in a Help to Buy ISA, a transfer could make sense, according to Coles.

“Bear in mind, you can always use the Help to Buy ISA for a house purchase, and consider opening a LISA for retirement savings after your house purchase, if it suits your circumstances,” she added.

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