Is it still worth taking out a Help to Buy Isa?

28 March 2019
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Help to Buy Isas have been a roaring success, helping more than 150,000 people buy their first home.

However, the scheme is set to close to new applicants at the end of November this year, leaving just a few months to take advantage.

How does the Help to Buy Isa work?

The Help to Buy Isa (HTB), which launched in December 2015, offers bonuses of up to £3,000 to people saving for their first home.

It gives first-time buyers saving for a deposit the opportunity to put away £1,200 initially, then £200 a month up to a maximum of £12,000. The government will top up your savings by 25%, up to a maximum of £3,000. This means overall you could squirrel away £15,000.

You can save up to £3,400 in the first year then £2,400 in subsequent years.

Couples buying together can combine their bonuses, meaning a potential boost of up to £6,000 towards a deposit for a first home.

You can get HTB Isas from several providers, including Nationwide, HSBC, Lloyds and Halifax.

The current best buy HTB Isa is from Barclays, which pays 2.58% interest, while you will get 2.5% if you opt for Nationwide.

If you withdraw your money from a Help to Buy Isa, there are no penalties.

Lifetime Isa alternative

When HTB Isas first came out they were a no-brainer. However, they now compete with the Lifetime Isa (Lisa). The Lisa is seen as the long-term replacement for the HTB Isa and has some advantages over its predecessor.

The Lisa can be used by first-time buyers to fund a deposit for a property or taken tax-free at the age of 60.

The annual allowance is greater than the HTB Isa. With a Lisa, you can put away up to £4,000 a year – well above £2,400 (£3,400 in the first year) for the HTB Isa. 

On top of this you have the 25% bonus just like the HTB Isa, but as you can save more for longer the bonus is also potentially bigger.

With the Lisa, you can get a bonus of £1,000 a year up until you are 50. If you open one at the age of 18, this means you could end up with a maximum bonus of £32,000 – far higher than HTB’s £3,000.

If you take out the top rate Cash Lisa with Newcastle Building Society you will get 1.1%, while Nottingham Building Society and Skipton Building Society are offering 1%.

However, there are some restrictions with a Lisa. You have to keep your money in a Lisa for a minimum of one year before you can withdraw it, whereas you can get at your cash anytime with a HTB Cash Isa.

If you take your money out before you are 60 and you don’t use it to buy a home, you will have to pay a 25% penalty on the whole amount, that is 25% of what you’ve saved plus the government bonus.

For instance, if you save £1,000 and get a £200 bonus, then withdraw it, the penalty will be charged at 25% of £1,200. This means you will only get back £900.

If you withdraw your money from a HTB Isa, there are no penalties.

Lifetime Isas are generally a better bet as you can save more. However, if you are looking to take out your money in the first year or you are over 40, you could opt for the HTB Isa.

 

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