There ain’t no magic money tree, says the government.
But the powers-that-be have sure splashed the cash on savings schemes for first-time buyers in recent times.
The Help to Buy and the Lifetime Isas bung you 25 per cent extra towards your property nest egg.
But what’s the logic behind these accounts? Are they worth your while? We weigh up the merits of the LISA and H2B Isa to find out which option is best for you.
The government introduced the Help to Buy Isa in December 2015 amid growing fears that generation Y was being locked out of the housing market.
As explained in Avo CAN do, property prices have risen in many parts of the UK – leaving young people to save more, for longer, in order to climb on the property ladder.
The Help to Buy Isa was part of a bigger package of support for first-time buyers known as Help to Buy. The H2B Isa is one of three components in this scheme – the other two were the Help to Buy Equity Loan (which is continuing for the foreseeable future) and the Help to Buy Shared Ownership scheme (a smaller-scale version of traditional shared ownership, which may be available in your local area – more details to come).
The Help to Buy Isa has been a qualified success since it launched – see the statistics below. While popular with the middle-class and young professionals who’ve been hit hardest by rising property prices, the ISA has been criticised for a sting in the tail which forbids buyers from accessing their deposits until after they have exchanged contracts.
The Help to Buy scheme as a whole has also provoked wider criticism. By offering free money to those saving for a house, the government is undoubtedly pumping up demand for property at a time when the housing market is already over-heated, with weak efforts to raise supply (by building more homes and lifting development restrictions).
The Help to Buy Isa has also been taken over by political events. It has since been followed by another government-backed product, the Lifetime Isa, which launched in April 2017 and is aimed at providing bonuses towards home AND retirement saving. The Lifetime Isa also scrapped a major flaw that beset the Help to Buy scheme and allows higher contributions, though so far it has only backed by a handful of building societies and pays lower interest.
The mastermind of these two products – George Osborne – is no longer serving as Chancellor, and while the current government has committed to the Help to Buy equity loan, the Isa was soon condemned for the scrapheap. It will end on November 30 2019.
The Lifetime Isa is likely to stick around, though there have been recommendations by MPs to scrap the product amid (arguably questionable) claims of low take-up and potential mis-selling.
An Isa is an acronym – Individual Savings Account.
It’s tax-free. That means that you don’t have to pay or declare tax on any money you put into an Isa.
You can also keep all the interest you earn or profit you make on Isa money.
The Isa has been around for 20 years so it’s pretty well-established, though many people feel the Isa world has got too complicated.
That’s because there are SIX different types of Isa now available, although you can only open up to four per year. And as we have already established, the Help to Buy Isa is coming to an end.
Everyone gets an Isa allowance that lasts for the whole tax year, starting on April 6. Currently, the Isa allowance stands at £20,000.
Unfortunately, that DOESN’T mean you can put £20,000 into whichever Isa (or combination of Isas) you fancy.
There are only three types of Isa that accept the maximum amount each – cash, stocks/shares and the Innovative Finance Isa (which covers peer-to-peer lending).
In theory, you could put the whole 20k into one of those products, divvy up the allowance between two of them or split it between those three. And you could divide up the money however you like. The same principle applies to whatever you can afford to put into these Isas. And if you got a bit more cash as the tax year marched on, you could add more to one, some or all of those products.
The other three Isas work differently. The Junior Isa (which is aimed at children) and our new friends, the Help to Buy and Lifetime Isas, all have lower contribution limits.
If you open either a Help to Buy or Lifetime Isa, your contributions into those will count towards your overall Isa limit – this should be factored in if you decide to take out another Isa product in any given tax year.
We’ll be covering Isas in a lot more detail further on in the course – but all you need to know for now is that Help to Buy and Lifetime Isas sit apart from the other Isas because they have a much lower ceiling on contributions. The other Isas allow you to invest up to £20,000, either in one or a combination of 2 – 3.
You can save up to £3,400 in the first year of taking out an H2B Isa – then it falls to a maximum of £2400 per year.
You can buy any kind of property worth up to £250,000 outside London, and £450,000 within the capital – it doesn’t just apply to homes built for the Help to Buy equity loan (a small mercy).
You can also take it out at any age – unlike the Lifetime Isa, which is only available for the under-40s.
The big draw is that you get a bonus of 25 per cent from the government on the total deposit you have saved.
But there’s a catch.
You only get the bonus once you have agreed to buy a property. That means you have to wait for the extra cash until AFTER you have exchanged contracts.
In the meantime, you be asked to produce a Home Exchange Deposit to secure the property. This amounts to 10 per cent of the overall purchase, though it can be negotiated downwards if you’re fortunate. But many buyers will have banked on the bonus making up the total sum needed. So if you are having to wait days or even weeks for that bonus to come through, there is a risk that you’re suddenly missing a substantial chunk of money needed to guarantee the deal.
There has been fierce debate about how much this little-known booby trap has disrupted first-time buyers, and whether it was properly explained to them when they first took out these accounts. There have been highly publicised cases in the media where buyers have had to postpone deals or borrow from friends and family to bridge the gap.
The government argued that withholding the bonus was necessary to stop people pulling out of property sales once they got free taxpayer cash and waltzing off into the sunset. And the upside of this restriction was that less-than-committed savers – or those who found themselves in a dire financial position – could withdraw their money early without penalty, forgoing the bonus they would have received if they stayed the course.
Even if the figures quoted above are broadly accurate, they suggest three quarters of property purchases have gone ahead without major problems. Is that because most savers were aware of the conditions and planned ahead? Or were they just in a better position to make up the shortfall when the time came?
Some have suggested that the property market soon became all-too-aware of the H2B Isa catch. Many sellers agreed to reduce or even waive the requirement for a home exchange deposit until the government bonus came through.
But there can be no doubt the H2B Isa was poorly marketed and explained to customers. And there were enough cases of first-time buyers being plunged into financial crisis to trigger a major policy rethink.
Cue the Lifetime Isa…
The Lifetime Isa – or LISA – is very similar to the Help to Buy Isa – but there are some notable differences.
You can save up to £4000 a year (higher, you’ll note, than Help to Buy). You get the 25 per cent bonus every month (up to £1000 a year), so it will count towards your deposit from the very beginning, and you can use it for both your first home AND retirement,
The version available for home savers is the cash Lifetime Isa – that’s because cash is protected by the Financial Services Compensation Scheme in case your bank/building society went bust, and you won’t lose your money. And obviously that matters a lot when you’re saving for your first home! There is a stocks and shares version available for retirement, and we will cover this in-depth in our future guides.
Right now, most of the financial industry regards the cash Lifetime Isa as more trouble than its worth. That’s because big questions remain over the way it’s sold and tax problems, which are too complicated to go into here but I could provide via email if you’re looking for an effective sleeping aid.
That means only three brave financial institutions are offering the cash LISA – and they are ALL building societies.
Skipton Building Society: 1% ( up from a measly 0.5 per cent when it first launched)
Nottingham Building Society: 1%
Newcastle Building Society: 1.1% (the winners of this particularly tepid rate war!)
So 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.
Sure, none of these accounts pay a rate that beats inflation, which is currently running at about 2 per cent (ouch). That means that you would be losing money – were it not for that whopping government bonus of 25 per cent.
Modest savings? Reluctant to commit? Close to buying? Go for Help to Buy
If you can only save relatively small amounts (below £200) a month or you’re not sure about whether you want to commit to house saving, you’re better off using the best Help to Buy Isa on the market (from Barclays, surprisingly). It currently pays a not-too-shabby 2.58 per cent. If you’ve been saving up for a while and you think you’ll be buying within the next 12 months, it’s also probably not worth your while to make the switch to the LISA. 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
If you reckon you can save more than £200 a month, you may want to move into the LISA. But beware – the pot is not to be withdrawn due to an onerous 25 per cent penalty on the whole amount you’ve saved. Which brings me onto my next point…
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 unsecured debts and saving some money equivalent to a few months of 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, 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 know a fair bit about investing, who won’t need to withdraw any time soon and can ideally keep it invested for at least five years. If you don’t tick those boxes, play it safe and go for a cash LISA.
You go shake those magic money trees baby.
Once you’ve built up enough cash, I’ll take you through the must-knows in finding your *perfect* property match. And if you’re still trying to find those crucial savings for your property fund, check out the first part of our series right here!