The Help to Buy ISA seemed like a great idea if you were planning on getting onto the housing ladder and wanted some help from the government in the form of a bonus.
Seemed, because the scheme closed to new applicants in 2019. Of course, if you have money in a Help-to-Buy ISA it is perfectly safe and should be still growing steadily, and you can keep saving into it until November 30, 2029. But you may be wondering about the best way to get that cash working for you now.
At Continuum, we are looking at the answers.
Looking at existing arrangements?
What exactly was the Help-to-Buy ISA?
The Help-to-Buy ISA was a government initiative that supported people putting away cash for their first home.It let people over 16 put in up to £1,200 in the first month and £200 a month thereafter to build up a maximum of £12,000.
Like other ISAs, the taxman could not take a share – but what made the scheme really worthwhile was the fact that as well as interest, savings earned a government bonus of £1 for every £4 put in, meaning a very worthwhile extra cash sum of up to £3,000.
The main problem was that the cash in a Help-to-Buy ISA could not be used for the home exchange deposit therefore could not be used as a deposit to secure against your property, The exchange deposit would be payable at exchange of contracts, whilst help to buy bonus would be paid on completion. Potential borrowers may have been concerned they could not afford the initial deposit and may have had to consult with the sellers solicitor to see if they could initially pay a smaller deposit, with the balance paid on completion
. There were limits on transferring in cash from other ISAs and the interest was disappointing particularly as there were no Stock and Shares Help-to-Buy ISAs.
So what can you do now?
The obvious answer is that you can use the money built up in your Help-to-Buy ISA for the purpose it was intended, which is of course towards the purchase of your first home.
This is in some ways the easiest way to access your cash. Your solicitor will arrange for it to be paid over to your account as part of the completion process. But if you are not ready to buy a first home, or if your plans have changed, there is a lucrative alternative.
Switch to a LISA
A LISA is a Lifetime ISA, the natural successor to the Help to Buy ISA, also offering big bonus payments from the government on top of interest from the money you put in. You can in fact have both of them, although you can only get the first-time buyers’ bonus on one, but there are two big advantages that a LISA has.
The first is that unlike a Help to Buy ISA, a LISA can also be used towards retirement saving. Most people will have rather longer before retirement than buying their first home, but if you are not planning on stepping onto the lowest rung of the property ladder for any reason, switching funds to a LISA will provide an alternative way to get your money working for you.
This brings us to the second advantage. You can put a great deal more into a LISA and enjoy much larger bonuses.
You can pay up to £4,000 a year into a LISA instead of £2,400 into a Help to buy ISA and enjoy a maximum annual bonus of £1000 instead of £600. What’s even better is that instead of a £3,000 maximum bonus, you could potentially get a bonus of £33,000 – although you would have to open it when you turned 18 and pay in the maximum until you reached the age of 50.
So, should you switch?
The extra returns on a LISA do look tempting, but they might not be the answer you need.
First, remember you should not switch if you are planning to buy your first home soon. With the LISA you need to have held the account for a year before you can use the bonus towards your first home.
Second, remember that you can’t take out a new LISA if you are 40 or older.
With a Help to buy ISA, you can actually withdraw money at any time and still get any interest earned, you just don’t get the bonus. With a LISA, if you withdraw for anything other than buying your first home or before you turn 60 there is a withdrawal charge of 25% of the balance, which recoups the bonus plus an additional charge equivalent to 6.25% of the money you put in. So you should only shift to a LISA if you’re pretty certain you will be buying a qualifying home – which means a first home costing under £450,000.
Need some help?
The question of whether a Help to Buy ISA, LISA or conventional ISA is right for you will depend on your personal circumstances.
To understand what is the best decision for you, you might require some personal advice. At Continuum we will be very happy to provide it. Simply contact us for the help you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Equity investments do not afford the same capital security as deposit/cash accounts, when investing your capital is at risk
Source – Lifetime ISA – GOV.UK (www.gov.uk)