Changing Help to Buy ISA rules could help more than 2 million first-time buyers

A recent Freedom of Information (FOI) request made by Finder has found that millions of people could be trapped in Help To Buy (H2B) ISAs, with nearly 2.2 million currently open, holding a total value of almost £5.5 billion.

What is a Help to Buy ISA?

A Help to Buy ISA is a type of savings account to help first-time buyers purchase their first home. You can pay £200 a month into the ISA and the government, will top up your savings by 25%.

For example, if you’d saved the maximum of £12,000 over 5 years, and used this to purchase your first home, the government would add an extra £3,000 on top to give you a total of £15,000. There is a purchase price limit of £250,000 (or up to £450,000 in London).

What’s the issue with Help to Buy ISAs?

While house prices have been rising, the Help to Buy ISA limit has not increased. Research by Finder found that over half (58%) of UK regions will have average property prices above the H2B ISA’s current limit of £250,000 (for non-London properties) within 4 years. Since the H2B ISA was introduced in 2015, the average house price has increased by 38%, yet the limit has never increased.

The scheme is also being discontinued by the government – it is no longer possible to open a H2B ISA, and you won’t be able to pay into it after 2029. The Lifetime ISA (LISA) was effectively brought in to replace the H2B ISA and it helps resolve the property value issue with a house price limit of £450,000 across the UK. You can also pay up to £4,000 a year into it per year vs the £2,400 a year with a H2B ISA.

Both the H2B ISA and the Lifetime ISA come with a 25% bonus. However, the 25% bonus only gets applied on a H2B ISA when a property is purchased, whereas the 25% bonus is paid as you save in a LISA, but will only remain valid if you use it to purchase a house or access it when you turn 60.

First-time buyers are restricted when transferring a Help to Buy Isa to a LISA

You can’t combine a LISA and H2B ISA, meaning that someone wanting to take advantage of the LISA’s superior benefits would need to transfer their capital across. However, you aren’t allowed to move it all across into a LISA at once. It is only possible to transfer up to £4,000 per year across, at the expense of adding fresh money into a LISA.

How can the Help to Buy ISA issue be resolved?

The main issue with trying to move from a Help to Buy ISA to a Lifetime ISA is that you are limited in the amount you can move in one go. Finder believes this could be resolved by a more flexible approach to combining Help to Buy ISA and Lifetime ISA savings, which does not penalise those who have already spent years saving into a Help to Buy ISA.

Commenting on the findings, Matt Mckenna, personal finance expert at finder.com said:

Written by

Matt McKenna

Matt is Finder's Head of Communications & Content Marketing (UK), overseeing research, surveys and spokesperson appearances. See full profile

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