There ain’t no magic money tree, say the Conservatives. But that hasn’t stopped them splashing the cash on first-time buyers initiatives in recent times. Bountiful schemes like the Help to Buy and the Lifetime Isa, which bung you 25 per cent extra towards your property nest egg, have taken over from modest Home Saver accounts as the most alluring way for people to save for a first home. But what’s the logic behind these accounts? Are they worth your while? And how can you benefit from our overlords’ generous mood when it comes to that extra bung towards housing? We weigh up the pros and cons of the LISA and H2BISA to find out which options are best for you…
Hold the front page! We have a new Lifetime Isa! Hooray!
Er, what do you mean you haven’t heard of it?! Surely the government has put a flyer personally through the door of your rat-infested, possibly combustible rented flat to let you know that you’re basically going to get FREE MONEY towards your first home if you can only give up the mochas and the Glasto tickets?
Okay, so like with all new financial initiatives, it’s only a minority who seem to really cotton on. And unfortunately, it could well be argued that those in the know tend to be those who are Alright Jack and don’t *really* need that extra final push onto the housing ladder.
As we’ve explored on YMB, the Help To Buy Isa has become a bit of an Empusa-esque financial product. If you don’t who Empusa is, you haven’t lived my friend.
For she is a monster in Greek mythology who appears to be breathtakingly attractive and seduces her male conquests as they sleep, only to drink their blood and feast on their flesh. Nice!
This was one of the nicer images of Empusa I could find online…
The Help to Buy Isa is admittedly less gory. But it has still lured savers with the promise of a bonus from the government only to sting them (and all of us) with some unknown consequences.
The bonus is worth up to £3000 if you save the maximum amount allowed (12 grand). So you make swathing cuts to all your little luxuries and funnel the cash towards your H2BISA (sounds like a type of bottled water from Iceland) because you’re convinced that you’d be mad not to when the government is slinging free dosh towards you for a house.
But the problems of H2B don’t just affect you when you come to buy, but the pulse of our already manic housing market and the ability of many others to get on the ladder in the long term.
For starters, you only get the cash WHEN you complete. So the bonus doesn’t actually go towards your deposit, as some savers found out the hard way when they realised they wouldn’t get the cash until contracts had been signed, forcing them to go cap in hand to Mom & Pop or even delay the transaction. Nightmare…
Secondly, the Help to Buy scheme prompts a fundamental question of whether it’s giving more (unnecessary) oxygen to housing demand, upping prices and putting more pressure on our already strained housing stock.
So has the government heeded these concerns? Er, partly. It still hearts the idea of taxpayer money being put up to help fund our property purchases. And that’s why it has launched an EVEN MORE generous savings vehicle – the Lifetime Isa.
Only this time you can use it to save for your first home AND eventual retirement. What’s more, you’ll actually be allowed to use the bonus towards your deposit (rocket science!), instead of it being restricted until post-purchase (when you’ve already started putting up the shelves from Ikea, or more likely got someone from Task Rabbit to do it).
Here on the blog, we take a questioning (and often scathing) but ultimately pragmatic attitude to these things. Do I think property Isas really help all in society and are designed to tackle the structural problems in our housing market? Hell no. Do I think they are ultimately a good idea for anyone who can take advantage and avoid the pitfalls? Absolutely.
So which avenue is best for YOU? Well, it turns out that assessing the value of respective property Isas is akin to studying astrophysics at Harvard, only a little bit harder.
Will we ever fully understand the mysteries of the (financial) universe?
But I’ve done the sums and got the measure of it (I think). So here goes…
There’s only one cash Lifetime Isa (sing it like a football chant)
Basically, the financial industry currently regards the cash Lifetime Isa as more trouble than its worth. That’s because big questions remain over the way its sold and tax, which are too complicated to go into here but I could provide via email if you’re looking for an effective sleeping aid.
So that means that only ONE financial institution is offering the LISA. That brave institution is the Skipton Building Society, which reckons that a 25 year old who uses up the product’s annual allowance of 4 grand for eight years will have a savings post of around £40,776 by the age of 33. Not bad.
The catch? Interest payable on the account (above and beyond that government bonus) is just 0.75 per cent. And anyone who reads this blog avidly will know that you usually wouldn’t get out of bed for anything less than the rate of inflation (at least). Currently, that’s running at 2.9 per cent. Ouch.
The maximum amount that can be put into the new product is £4,000 per year – £1,600 more than the £2,400 allowed in the Help to Buy version – and a 25 per cent bonus will be paid on annual contributions until the age of 50.
The H2B Isa is coming to an end
If you’re already saving into a Help to Buy Isa, you will any existing contributions honoured until 2029 and if you haven’t already taken one out, you can do do until 30 November 2019. After that, you won’t be able to buy a box-fresh H2B Isa.
You can have both accounts but you can only earn a bonus on one.
I do rather get the logic on this one. Would be ridic to earn a double bonus simply because you’re filthy rich enough to save into both…
Already in Help to Buy? What to do next
If you’re eagle-eyed, you may have noticed that contribution ceiling in the Lifetime Isa is higher than in H2B.So if you’re already in an H2B Isa, you may be thinking; should I make the switch?
The answer is…it depends. I KNOW that’s infuriating, but if I simplify it too much, I may as well turn this blog into a children’s cartoon.
I’ll try and explain it in a relatively straightforward manner…
Modest savers + near to savings goal = Help to Buy
If you can only save up to £200 a month OR you are buying imminently soonish, stay put (or go get one). You’ll be slightly better off if you use the most bitching Help to Buy Isa on the market (from Barclays, surprisingly). It currently pays a not-too-shabby 2.53 per cent. Of course, you still lose out when you come to buy if you need the government bonus to count towards your deposit. But if you can put up with this irritating and inconvenient caveat (either by borrowing the money or saving for a bit longer), this is your best bet.
Savers upping the ante = LISA (or wait and see…)
If you reckon you can save more than £200 a month, then kudos. It’s not easy but I reckon you might be able to make even small savings here and there that could add up to a bigger contribution into your property fund. If that’s the case, you may want to move into the LISA. That way, you can get hold of your Help to Buy bonus in May 2018 rather than wait for it (although it would still have to go towards your LISA fund, rather than a fidget spinner). But you don’t have to hurry, which is not normally the advice I dish out on this blog when it comes to products!
Or you can bide your time and see if any better deals come on the market – but I wouldn’t hold my breath, of course.
WARNING WARNING WARNING
Please don’t go treating these kitties as raid-able for your every whim and desire. You might have decided to take one out in a pique of virtue, thinking: “Yes, I WILL try to save for a home because that’s the sensible, grown-up thing to do! Look mother, I’m adulting!”
But a few weeks later, you totally regret the decision to cut back your spending and long for the days when you could just drop £100 on a night out at the Chiltern Firehouse BECAUSE YOU JUST FELT LIKE IT AND IT’S BEEN A BAD WEEK, OKAY?
You might just be tempted to dip your fingers into the Isa pot. Because technically there is nothing to stop you. But you would be a very silly billy if you did. Because you will get no government bonus in either Isa, making the whole exercise a waste of time, and you would have a further five per cent taken from the LISA funds if you withdrew early. So you may actually lose money in the process. Don’t do it!
Please remember that you’ve got to get the basics right before you can make a proper go of property saving. So that means paying off your expensive debts and saving a minimum of 3 months earnings into an easy access savings account. This is for the worse-case scenario stuff (e.g. you have to make a trip to visit an ill relative or your boiler goes kaput).
Beyond the short-term, you’ve gotta go big or go home
In the final analysis, you’ve got to ask whether saving into a cash LISA will be enough. There is another version of the LISA, a stocks and shares vehicle that allows you to put your property or retirement savings into the stock market for the chance (but not guarantee) of a better return.
The argument for taking this higher level of risk is that inflation could continue while interest rates remain stuck to the floor. If that’s the case, your cash would shrivel over time if kept on deposit in the bank. Whereas historically, stocks and shares have outperformed cash and generated a higher return (although the past is not a reflection of how the future will go).
BUT this option will only work for those who can stomach the possibility of losing the money, who won’t need to withdraw it any time soon and can ideally keep it invested for at least five years. If you don’t tick those boxes, FOR THE LOVE OF GOD PLAY IT SAFE!
Found this useful? Got any questions or comments? Let me know by leaving a comment or tweeting @ionayoungmoney…