Help to Buy ISA savers priced out of soaring property market

Help to Buy ISAs are closed to new customers, but around 2.5 million people have the accounts and could get a higher bonus and more expensive property by switching to a Lifetime ISA. Help to Buy ISA savers risk being priced out of the property market, as UK house prices have soared since the accounts launched and the limit on the ISAs has failed to keep pace. Someone using a Help to Buy ISA must buy a property worth up to £250,000 across the UK or £450,000 in London. This leaves those buying in expensive areas outside of London out in the cold, as they face being priced out.

The average UK house price has now soared above the Help to Buy ISA limit. A year ago the average house price was just under the limit, but it has risen £27,000 in the past year and is now £275,000 at the latest figures*. The limit on the Help to Buy ISA has remained the same since the accounts launched in 2015. If the limit had increased each year in line with average house price growth it would sit at almost £336,000 today. Anyone who wants to buy a property worth more than the limit faces not being able to claim the Government bonus on the Help to Buy ISA, meaning they face up to a £3,000 shortfall on their deposit money – the maximum bonus on offer.

Anyone buying in more expensive areas outside of London, in the south-east for example, or who knows their property price will exceed £250,000 could consider switching to a Lifetime ISA, which has a higher limit of £450,000 regardless of where in the UK you are buying a home.

However, anyone switching to a Lifetime ISA needs to be mindful of a few rules, to make sure the accounts are right for them. The biggest one is that the account needs to be open for a year before you buy a house, so it’s no help if you plan to buy in the next 12 months. But with a higher property limit, higher contribution limit and higher potential Government bonus, you could get more free money by moving.

*Based on ONS figures for December 2021: https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/december2021

The £250,000 Help to Buy ISA house price limit, if it had kept pace with average house price rises

Should I switch my Help to Buy ISA to a Lifetime ISA?

Which gives more free money?

Both the Help to Buy ISA and Lifetime ISA get the same 25% Government bonus, but with the Help to Buy ISA this is limited to the first £12,000 saved – meaning a maximum bonus of £3,000. With the Lifetime ISA you can get up to £1,000 a year in Government bonus, up until the age of 50. If you opened a Lifetime ISA at age 18, that is a maximum Government bonus of £32,000.

Which can you save more into?

You can save up to £4,000 a year into the Lifetime ISA, compared to the Help to Buy ISA where you can save up to £200 a month, plus an extra £1,200 in the first month you opened the account.

Which can you use to buy a home in the next 12 months?

You must have the Lifetime ISA open and have made your first contribution 12 months before you can use the money to buy your first home. This means if you plan to buy in the next year you should stick to the Help to Buy ISA, which doesn’t have this restriction.

Want to invest monthly or in a lump sum?

With the Help to Buy ISA you are limited to saving £200 a month and if you miss a month you cannot pay double in the next month. With the Lifetime ISA you can contribute up to £4,000 a year, in one or more lump sums or as a regular monthly saving.

Which allows you to invest?

You can only hold your Help to Buy ISA in cash, while you can invest your Lifetime ISA in funds, shares, investment trusts and ready-made portfolios. This means if you are saving your money for longer you have the potential to generate greater returns by investing.

When can you use the bonus for each?

The Help to Buy ISA Government bonus is only issued after you have exchanged on a property, so cannot be used for the initial deposit, which has to be handed over at exchange. With a Lifetime ISA the Government bonus is paid monthly, meaning it can be used towards your deposit at exchange.

What can I use if I’m over 40?

If you are over the age of 40, and have not yet opened a Lifetime ISA, you have missed the boat. This means your only option is stick with the Help to Buy ISA to buy your first property. Which can I get my money out of easily? With the Help to Buy ISA, if you change your mind or want to make a withdrawal, for something other than buying your first home, you can redeem your money. As the Government bonus will not have been paid into the account, you don’t need to return any money. With the Lifetime ISA, if you want to withdraw money for anything other than buying a first home, retirement, or if you have a terminal illness, you will pay an exit fee of 25%. This is intended to claw back the 25% Government bonus, but it actually results in you losing the Government bonus and paying £6.25 for every £100 you withdraw.

For example, if you invest £4,000 you’ll get the 25% government top-up and have £5,000 in total. If you withdraw this not for a first home or retirement you’ll be charged 25%, which equates to £1,250. This means you have £3,750 left, £250 less than your initial investment.