The legacy of Help to Buy ISAs
The Help to Buy ISA was introduced in 2015 to support people saving up for their first home. First time buyers who chose to save through a Help to Buy (HTB) ISA were eligible for a government bonus of up to £3,000. As it is an ISA any savings are tax free, and although it is designed to help people save for their first home you are able to take out the money whenever you want, but you only get the bonus if you use the funds to purchase a property. Although you are no longer able to open new HTB ISAs, you can still pay into the ISA until November 2029 and claim the 25% bonus until November 2030. Anyone who is now saving for their first home can now use the Lifetime ISA. We will take a look at how these ISAs work a bit later.
A few things to remember about the HTB ISA:
You can pay in up to £200 each month.
You can get a bonus of 25% (up to a maximum of £3,000) when you buy your first home.
You can use both bonuses if you buy with someone who also has a Help to Buy ISA.
You can use the bonus to purchase properties up to £250,000 (or up to £450,000 in London).
You must purchase a residential property in which you intend to live in.
You can purchase any property, not just new builds.
You must be purchasing a property with a mortgage, not a cash buyer.
There is no investment element, so your savings are not at risk of going down.
Most have the full £85,000 FSCS protection (if something happens with your provider).
There are two main points to be considered in terms of how the HTB ISA works.
Property Purchase Price
The rules on property purchase price are clear, you can only get the bonus on homes you buy for £250,000 or less, or £450,000 in London. London is defined in terms of its 32 boroughs and the city of London:
Enfield
Barnet
Harrow
Hillingdon
Brent
Camden
Haringey
Waltham Forest
Redbridge
Havering
Camden
Islington
Hackney
Newham
Barking and Dagenham
Ealing
Kensington and Chelsea
Westminster
Tower Hamlets
Hounslow
Hammersmith and Fulham
Southwark
Greenwich
Richmond upon Thames
Wandsworth
Lambeth
Lewisham
Bexley
Kingston
Merton
Sutton
Croydon
Bromley
So although you may be purchasing a property just outside a London borough, where the property price is just as expensive as within the London borough, you would not be able to get the bonus.
Using the bonus as part of your deposit
When you buy a home there are two types of deposit, but as the Government decided you'd only get the HTB ISA bonus at completion, it only helps you with one of these types, and it's important to understand the difference.
During the conveyancing process, after your offer is accepted, you will exchange contracts with the seller. At this point the seller will usually ask you to put down a 10% deposit (sometimes it can be negotiated lower to 5%) to secure the property. While you can use the money you've saved in a HTB ISA towards this exchange, it's only at completion that you receive the mortgage money and HTB ISA bonus – so the bonus won't help towards the home exchange deposit. If you're relying on the HTB ISA bonus to get you to 10% (or indeed only have a 5% deposit in total), it could be a problem. But, as long as you are upfront about your reliance on the HTB ISA bonus, it shouldn't be a major problem. Most sellers are unlikely to pull out because of a small shortfall which will be made good in just a matter of days when you finally complete. Your solicitor will be able to negotiate this for you.
The deposit at completion (sometimes called the mortgage deposit) is this final deposit when you actually become the legal property owner – this is what the HTB ISA bonus is for. At this point the mortgage funds and the HTB bonus are released to your solicitor to complete the purchase.
If you are not planning to purchase a property for at least a year it could be worth transferring your HTB ISA to a Lifetime ISA, which is designed to be used to save for your first home or for later life. If you don't use it for purchasing your first home you can wait until you're 60 and take your money out tax-free.
Like the HTB ISA, the Lifetime ISA (LISA) also has a 25% bonus if you use the savings towards a first home. If you're aged 18 to 39, you can open a LISA in addition to your HTB ISA, however you can only use the bonus from one of them towards buying a home. So, unless you want to use the LISA and its bonus for retirement savings, the main decision is whether or not to keep the HTB ISA, or transfer it to a LISA.
The LISA has some benefits over the HTB ISA:
You can save up to £4,000 per year in a LISA versus £2,400 per year in a HTB ISA.
You can choose to save cash or invest in the stock market.
You can earn a bigger bonus if you save over £12,000. The max bonus with a HTB ISA is £3,000 (£12,000 saved), but the LISA doesn't have this cap, so if you saved £4,000 per year from age 18 to 49, the maximum bonus would be £33,000).
You can buy a home up to £450,000 anywhere in the UK. The HTB ISA can only be used for a property costing up to £250,000, or £450,000 in London.
But there are also potential drawbacks to making the switch from your Help to Buy ISA:
A LISA has to be open at least a year to use it for a first home.
You'll pay a penalty to withdraw cash from a LISA, unless used for your first home or retirement. Unlike the Help to Buy ISA, where you can withdraw your cash whenever you like (just without the bonus), the LISA charges a penalty of 25%. So if you're not sure you'll buy at all, a H2B ISA is safer.
If you have more than £4,000 saved in a H2B ISA, you'll need to wait until a new tax year(s) to transfer it all. Money you transfer from a HTB ISA to a LISA still counts towards the £4,000 LISA allowance each tax year. This timing is important as, if you decide to buy whilst you've got cash in both, you'll essentially be sacrificing the bonus on one pot of money. So if you're going to transfer, make sure you have plenty of time before you're planning to buy to move your cash.
The value of investments and the income derived from them may go down as well as up.
