Help to Buy ISA limit hamstrings savers after prices rise 44%

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, comments on the Quarterly Help to Buy ISA statistics and Help to Buy equity loan data, showing ISA’s limit hamstrings savers after prices rise 44%.

Key points from publications:
    • By September 2022 – six-and-three-quarter years after launch – Help to Buy ISAs had been used to buy 531,507 homes. The scheme closed to new entrants in November 2019.
    • The average value of a property bought through the scheme is £176,828, compared to an average first-time buyer property price of £245,350
    • Outside London, the maximum value of a property that can be bought through the scheme is £250,000 – within London it’s £450,000.
    • The average UK property cost £295,000 in November – and the average in London cost £542,000.
    • The Help to Buy (equity loan) scheme closed in March this year– with the final completions on 31 March. These figures run until September 2022. Between July and the end of September, 6,531 properties were bought with a Help to Buy equity loan – down 11% from the same period a year earlier. This takes the total to 375,654.
Sarah Coles says:

“First-time buyers have been hamstrung by the Help to Buy ISA limit on property values. House prices have soared 44% since the scheme was introduced – leaving the £250,000 limit in the dust.  

“The savings scheme could become worthless for thousands of savers, and although the Lifetime ISA limit is much higher, unless the government rethinks how these limits are set – over time it risks a similar fate.

“Outside London you can only buy a property worth up to £250,000 with a Help to Buy ISA, and within London you can only spend up to £450,000. Both have fallen way behind average house prices, and with the average first-time buyer price over £245,000, it risks eclipsing that too.

“Since the scheme was launched in 2015, house prices have climbed 44%, while the limit hasn’t budged.

“It means there are only three of nine regions in England where you could buy the average property with a Help to Buy ISA (The North East, North West and Yorkshire and The Humber).

“The average price of a property bought through the scheme is far lower than the average for first-time buyers overall.

“It means that people have either had to settle for a cheaper home or withdraw their cash without a bonus in order to buy somewhere worth more than £250,000.

“The government needs to reconsider the limits on both the Help to Buy ISA, and the Lifetime ISA.

“One sensible option would be to link them to house price inflation, so buyers have the security of knowing that however long they save for, and however house prices move in the interim, they will be protected.

“The government also needs to reconsider the fact that LISA savers have to pay a 25% penalty if they buy a property worth more than £450,000.  

“This doesn’t just remove the government bonus, but a chunk of their own savings too. It’s ludicrous that people should be penalised for trying to do the right thing and being hit by forces out of their control.”

LISA may be nicer:

“If you have a Help to Buy ISA, you’re based outside London, and you want to buy a property costing more than £250,000, one option is to transfer to a Lifetime ISA.

“That way you can take advantage of the nationwide £450,000 allowance.

“You can also put more into a LISA – £4,000 a year – and the government will immediately top it up by 25% – so you could get £1,000 a year from the government to help you onto the property ladder.

“However, you need to follow the rules. It means you must be aged 18-39 (unless you already have a LISA) and you need to wait at least a year between the first money going into your LISA and the day you buy.

“You also need to be aware that you’ll pay a penalty if you don’t end up using it for a first house purchase, or holding it until retirement. If you’re concerned you may need to switch, it’s worth thinking about it sooner rather than later. You don’t necessarily have to switch all the money over immediately, just funding it with £1 will start the clock ticking.

“You also need to understand the mechanics of the switch. If you have more than £4,000 in your Help to Buy ISA, you can only switch £4,000 in each tax year.

“Money that’s switched will eat into your allowance for the current year, so if you use it all up with a switch, you may need to put cash you’re saving for a deposit somewhere else until April.

“It might still be worth it, because a 25% bonus on £4,000 is still better than a 0% bonus on everything in your Help to Buy ISA.

“However, you’ll need to calculate the best approach for your circumstances.”

 

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay