Help to Buy ISA: government scheme closes to newcomers this month — so should you take advantage?

Saving for your first home — an insurmountable challenge for many — got a little easier with the introduction of the Government-backed Help to Buy ISA, which has helped almost a quarter of a million people on to the property ladder.

The saving scheme offered thousands of pounds in bonuses to first-time would-be homeowners. And free money was, obviously, very good news.

The scheme ends for newcomers at the end of this month, which means there is now just over two weeks to decide whether to take advantage of it.

Help to Buy ISAs are offered by most major banks and you can open one with a deposit of anything from £1 up to £1,000.

After that you can add up to £200 a month into your account. For every pound you save the Government will add 25p, up to a maximum £3,000. Couples can each open an account and then pool their savings.

Savers also receive tax-free interest on their savings from the bank, though interest rates are low.

The current best offer, according to the website, is Barclays Help to Buy ISA, offering 2.58 per cent AER variable.

Martin Lewis, founder of Money Saving Expert, thinks opening an account is a “no-brainer”, even for people who are not yet at the home ownership stage of life.

Is a Help to Buy ISA or a LISA more suitable for you? (Shutterstock / WAYHOME studio)

If you open a Help to Buy ISA now with as little as £1, you can keep it for 10 years and start saving whenever you are ready.

What’s the catch of Help to Buy ISAs?

There are a number of aspects that you should be aware of:

  • The deposit is the single biggest obstacle to London home ownership but the money you save in your Help to Buy ISA cannot be used for your deposit when you eventually buy.
  • Instead it is paid to you on completion of your purchase, which means you can use it to reduce the size of your mortgage or to help pay for furnishings and moving costs.
  • If you take out the money for any reason other than to buy a house, you forfeit any bonus payments. 
  • It will take more than four years to save £12,000 and receive the maximum bonus, so the Help to Buy ISA is certainly not a quick fix. 

Despite these concerns, Dilpreet Bhagrath, a mortgage adviser and customer experience manager at Trussle, the online mortgage broker, opened her own Help to Buy ISA this month.

“I do not expect it to be my sole form of savings, but it will still be money I can use,” she says.

“I would definitely say to anybody struggling to save, I don’t think there would be any harm in opening up a Help to Buy ISA, but you are going to need to save elsewhere, too.” 

Lifetime ISA vs Help to Buy ISA

A lower-profile Government-sponsored saving option is the Lifetime ISA — the “Lisa”.

This is open to 18 to 40-year-olds to save either for their first home or for retirement. Savers can put in up to £4,000 a year until the age of 50 and receive up to £1,000 a year in bonuses in return.

You can withdraw your money to buy a property, or, if you are using a Lisa as a retirement top-up, once you reach 60. But again there are catches:

  • If you are buying a property, you will have to wait a year before withdrawing your money.
  • If you need to take the money out for another reason you will pay a 25 per cent charge on your savings — so you could end up with less than you’ve paid in. 
  • If you save the maximum £4,000 per year, and receive a £1,000 bonus, then after five years you will have saved £25,000 which, while a good lump sum, is nowhere near a London deposit. On the other hand bonuses are paid monthly, which means a Lisa can be put towards a deposit.
  • Under the scheme first-time buyers are restricted to homes costing £450,000 or less, which in London is not a generous budget. 

Steve Watson, head of customer proposition at investment advice website Smarterly, prefers the Lisa to the Help to Buy ISA.

He says: “With a Help to Buy ISA the maximum bonus is £3,000. With the Lisa you earn bonuses of £1,000 a year, to a maximum of £32,000. 

“Okay, it is not a life-changing amount of money. But it is money you would otherwise not have made.”

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