Weirdly, I’ve seen quite a few popular Twitter threads recently reminding people that they haven’t got long to open a Help to Buy ISA.
While I’m 100% glad a financial product has gone viral (lol), I think I should probably elaborate on why this is (or isn’t) something you should be paying attention to. Also, there’s a massive amount of misinformation being shared in the replies, which is typical for Twitter, but it might be leading you into making a decision that isn’t right for you.
Again, I’m not a financial adviser, please seek advice if you’re ever unsure.
Facts you should know
You have until the 30th of November 2019 to open a Help to Buy ISA. It is a cash ISA that will pay you some interest (tax free), but what makes it special is the government will give you a 25% bonus on whatever you have in your account, but you must use all the money towards the purchase of your first home.
You are allowed to open a Help to Buy ISA if you have never owned a property before.
Once you’ve opened one you can pay in a maximum of £1,200 to open it, then £200 a month up until the 30th of November 2029, and you’ll have to use it for your deposit before the 1st of December 2020.
It is being replaced by the Lifetime ISA which is a very similar product, but it has different rules. I have had both, and there are upsides and downsides to each one, please educate yourself before making a decision.
This is important:
You can open both ISAs, but you can only get the bonus from one.
Things causing people confusion
I’m convinced part of the reason the government is shutting down the Help to Buy ISA is because everyone keeps thinking it’s the same thing as the Help to Buy scheme. A Help to Buy ISA is not the same thing as the Help to Buy equity loan.
This is just a savings account with a bonus, it is not a loan, you do not have to pay it back, you do not have to use it on a new build. You can take your money out at any time without a penalty. There really aren’t any massive downsides to opening an account.
People also think you can’t use your Help to Buy ISA for your deposit. That is not true, it’s actually sort of scary that actual FINANCIAL ADVISERS are walking around saying this.
This quote is from the literal government Help to Buy site:
The bonus must be included with the funds consolidated at the completion of the property transaction. The bonus cannot be used for the deposit due at the exchange of contracts, to pay for solicitor’s, estate agent’s fees or any other indirect costs associated with buying a home.
Quick translation – when you buy a house, there’s actually two parts to your deposit. You have to pay 10% deposit (can sometimes be 5%) at exchange BEFORE COMPLETION, then you pay the rest of your deposit UPON COMPLETION. Your Help to Buy ISA bonus (important) can only be used on that second wodge of cash for your remaining deposit. However, the other money in your Help to Buy account (the other 75%) is fine to use for that first 5% or 10% deposit at exchange. So yeah, people are LIARS.
You can see a timeline of events for buying my house, which shows when and what I paid in my house purchase.
Want to join a community of other people trying to buy their first home? Join my free Facebook group First Time Buyer Wannabes.
Why you should just get a Lifetime ISA instead of a Help to Buy ISA
You can save more into it.
With a Help to Buy ISA you can save a maximum £3,400 in the first year, then £2,400 per year following that. A Lifetime ISA allows you to save a maximum of £4,000 a year. Simple maths shows you’ll get a bonus of £600 per year if you pay the maximum into a Help to Buy ISA, but you’d get £1,000 if you did the same with a Lifetime ISA.
You can use a LISA for a more expensive house
One of the rules for a Help to Buy ISA is that you can use it on a property worth a maximum of £250k outside London or £450k inside London. The Lifetime ISA can be used on properties worth up to £450k anywhere. We viewed many homes outside of London that were in the region of £250-£300k when we were looking. Depending on where you live this caveat could make a big difference to you.
The payments are more flexible
After the first maximum payment of £1,200 into a Help to Buy ISA, you can only pay in a maximum of £200 a month. If you miss a month, you can’t put in £400 the next month. For a Lifetime ISA you can deposit a maximum of £4,000 per financial year, so there’s no need to worry about regularly saving the same amount each month.
If you already have a cash ISA
The rules about ISAs are that you’re allowed to pay into a maximum of one of each type of ISA each tax year. A Help to Buy ISA is a cash ISA, so if you already have a cash ISA you can’t pay into a H2B ISA in the same year. A Lifetime ISA is not a cash or a stocks and shares ISA. It’s its own new type of ISA, even though you can get a cash LISA or a stocks and shares LISA. Wow, okay that is confusing.
Why you should definitely open a Help to Buy ISA instead of a Lifetime ISA
If you’ve never owned a home and are over 40 years old.
You can’t open a Lifetime ISA if you are older than 40, harsh but true.
If you might need to access the savings in your ISA for something other than buying a home.
There’s a penalty of 6% for anything you withdraw from a Lifetime ISA. It isn’t a great idea to have a Lifetime ISA as your only savings account. If you do choose to get a LISA, have an emergency fund saved elsewhere too so you won’t lose money if you need to take any out.
If you’re completing your house purchase in less than a year.
You only need a minimum of £1,600 in your Help to Buy ISA to get a bonus from the government. Pay in the maximum and you can do this in only three months. Your Lifetime ISA must be open for a full year before you can use your money on a house penalty-free.
So… what should I do?
I can’t tell you what to do. If buying a house is something that’s going to happen for you soon, what I’ve written above should help you make a decision.
But, there is no harm (apart from possibly losing 6p) in putting £1 in both types of ISA just to make sure you can eventually use the one that might suit you better further along the road. I’ve had questions from young people who are worried about it, and it’s impossible to know what will be the best choice for you when it’s going to be 5 or 10 years before you buy a house.
As I’m not a financial adviser I can’t recommend specific accounts, just compare interest rates and you shouldn’t go too far wrong.
I hope this has cleared it up, at least a little bit!