Failings of Help to Buy ISA

Posted in June 2024

Millions of frustrated would-be first-time buyers have found themselves trapped by the limitations of government deposit saving schemes, which have not kept up with rising house prices.

Failings of Help to Buy ISA

In 2015, the Help to Buy savings account was first introduced, but has since been closed for new accounts since 30th November 2019. However, if you’ve already opened a Help to Buy ISA, you can keep adding to the savings in your account until November 2029, with a further 12 months to claim the Government bonus towards your first home.

The Help to Buy savings scheme allowed holders to pay in £200 per month and in turn, would see them receiving a 25% top-up from the Government.  This would allow savings up to £12,000 with a further £3,000 received as a bonus.  It was designed by the Government to help people save for a mortgage deposit to buy a home – either a flat or a house (not necessarily a new build).  To qualify for this scheme, you needed to be a first-time buyer and not own a property anywhere else in the world.

However, over the years, property prices in London were rising much faster than the maximum savings of £15,000 for a deposit could ever help with.  In addition, there was a price cap to contend with of £450,000 in the capital (£250,000 elsewhere).

This limit has presented many challenges for Londoners trying unsuccessfully, to find property matching the restrictions of the criteria.  For some people, it has proved almost impossible to find a property in their preferred part of London, due to the purchase prices being significantly higher than £450,000.

Recently, it has come to light that 2.2 million people have found themselves trapped or in limbo, saving for a deposit with the Help to Buy ISA scheme.  Finder, a price comparison site recently revealed that around £5.5 billion of savings are currently held in these accounts.

According to the latest HM Land registry figures, house prices in London are now closer to £499,663.  This has resulted in a shortfall of almost £50,000 above the Help to Buy ISA limit of £450,000 in the capital and furthermore, requires a 10% deposit of £49,966. 

Finder has also found that house prices in the UK have risen by 38% since the scheme was first introduced in 2015, however, the cap has never been increased to reflect this.

In 2017, the Government introduced the Lifetime ISA (LISA) as an alternative to the Help to Buy scheme.  Although LISA holders can pay in up to £4,000 a year and receive a 25% top-up from the Government, the house price cap for London of £450,000 remains unchanged.  It is also not possible to combine the Help to Buy ISA with a LISA. Thereby meaning, that although you can technically save more under a LISA scheme, the top-up bonus saved in a Help to Buy ISA cannot be transferred. 

This is viewed as a major and unfair flaw by many, which is why Finder has launched a campaign to allow savers that find themselves stuck with a Help to Buy ISA, the ability to transfer their savings (and any government bonus) to their LISA.  Matt McKenna, Personal Finance expert at Finder said “It is hard to escape the feeling that the public are the ones being punished for the failings of the Help to Buy ISA being kept up to date, with billions of pounds left in limbo.”

 “The Lifetime ISA effectively superseded it and offers more opportunity to save each year, so why can’t people simply transfer their savings – and the bonus they were promised – into it?” 

But even if these changes were successfully implemented, there is still the dark shadowy threat of a forfeit.  If a buyer were to use LISA to purchase a property over the £450,000 London limit, they would face a fine of a 25% penalty charge.  Meaning that where £20,000 has been saved with a £5,000 bonus top-up, you would need to pay back £6,250.  During the tax year of 2022-23, there were approximately £47.2 million of withdrawal charges recorded by HMRC.

The hope is that the help and support needed by potential first-time buyers still struggling to step onto the property ladder, will be urgently addressed by the next government.  Otherwise, those saving for a new property in London, may be overlooked yet again.

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