Help-to-Buy ISA: should I still apply?
11 July, 2017
There have been mumblings in the media about the government possibly scrapping the Help-to-Buy ISA. So should you still apply for one? How do they help with saving for a deposit, anyway?
Short of a fairy-godmother, there isn’t much that can close the gap between exorbitant house prices and meagre pay packets. However, the straightforwardly-named Help to Buy (H2B) ISA has gone a little way to help cash-strapped buyers save for a deposit. Lately, though, word’s been bandied about that it will be scrapped. Banks and building societies still offer H2B and it’s one of only a few options to help buyers save (https://www.boringmoney.co.uk/learn/learning-paths/rebellious-renters/), but should they look elsewhere just in case? Nobody wants a nasty surprise a year or two down the line.
Part of the reason H2B ISAs are being raked over is that they are bundled along with the H2B housing scheme, a complicated whack of policy designed to lower the first rung of the property ladder. This in turn may be scrapped because there are signs that it disproportionately benefits wealthy buyers. For example, the salaries of those doing the H2B housing scheme are an average of £55,000 (£72,000 in London). There are also concerns that the H2B inflates property prices in certain parts of the country. But this is the H2B scheme, which contains different policy ideas and financial products, not the H2B ISA alone. Admittedly, the names are confusing, but y’know, hopefully the government will be able to separate the two.
There is actually plenty of evidence that the Help to Buy ISA is encouraging home ownership in poorer parts of the country. A recent survey by Which? found: “The Help to Buy ISA can be seen as a real success in areas where house prices are cheaper compared to the national average…The areas where the most bonuses were paid are in North West England and the Humber – combined, both areas account for 24% of all bonus pay outs. The average property values here are £148,098 and £145,313, respectively (https://www.which.co.uk/news/2018/08/help-to-buy-isas-cut-home-buying-wait-by-three-years/).” It found that that H2B ISAs could cut the time spent saving for a deposit by three years.
As a refresher, an H2B ISA means (https://www.helptobuy.gov.uk/help-to-buy-isa/how-does-it-work/):
The Government will boost your savings by 25% up to a maximum bonus of £3000
To receive that, you need to have saved £12,000.
The money has to be spent on your first home and couples get one each.
The minimum saving to receive a government bonus is £1,600.
You can only save in cash, though interest rates tend to be higher than for other savings accounts. The current highest rate is Barclays at 2.55% (https://savingschampion.co.uk/best-buys/personal/help-buy-isa/).
The question for investors is whether they should be getting one today.
After all, even if H2B ISAs are subject to a misunderstanding, it doesn’t mean they won’t be scrapped. They cost the government money at a time when it doesn’t have any. Many also believe they have been upstaged by the Lifetime ISA (https://www.boringmoney.co.uk/learn/investing-guides/product-guides/lifetime-isa/), which allows people to save not only in cash, but also in stocks and shares (though there are rumours that Lifetime ISAs might be going the way of the dodo as well).
For investors today, the cash rates provided on Lifetime ISAs are not as attractive and relatively few people who are saving for a house deposit will want to take a risk on stock market investment. As such, H2B ISAs are still a really useful tool for most wannabe homeowners. Certainly, there is a danger that they will be scrapped, or rolled into a lifetime ISA, but there are likely to be transition arrangements for existing savers and you’ll have had a few years of higher rates. Our verdict? Get ‘em while they are still going, because some savings help is better than none at all.