ISAs to help first-time buyers save a deposit are becoming increasingly ineffective because of outdated restrictions and rising house prices, experts have warned
The Lifetime ISA (LISA) and Help to Buy ISA (HTB ISA) are both savings schemes which are specifically designed as deposit saving tools – they both offer tax-free interest and a 25% government bonus.
Whilst the Help to Buy ISA is no longer open to new applicants, the LISA is still very much up and running and offers savers between 18 and 39 the chance to save up to £4,000 a year toward their first home or retirement.
But whilst both products offer great incentives for savers and homebuyers, they also have restrictions which are becoming increasingly more outdated and preventing more and more buyers from achieving their homeownership dreams.
In the last week, several financial organisations have made calls for the products to be upgraded and restrictions loosened to help more buyers benefit.
We have taken a closer look at the problems and potential solutions…
Help to Buy ISA restrictions
Let’s start with the Help to Buy ISA. Although this is no longer open to new applicants, those who hold an HTB ISA can continue to save up to £200 a month up to a maximum of £12k in total, until November 2029. The government will top it up by 25% – up to £3,000 – and buyers can claim this until November 2030.
Along with the restriction on how much can be saved, the HTB ISA has a rule which means savers can only purchase properties priced at £450,000 in London and up to £250,000 outside the capital.
Analysis by Finder.com, revealed the rate at which house prices are rising means over half of local authorities in the UK could have average property values above the HTB ISA limit by 2028.
In London the problem is even more intense as four in five boroughs will exceed the average price range for those with an HTB ISA.
Lifetime ISA restrictions
Lifetime ISAs (LISAs) offer savers the ability to save up to £4,000 a year with interest and with a government bonus of 25% added annually up to £1,000. To open an ISA you must be aged between 18 and 39.
There are other restrictions, however, that are of more concern. There is a withdrawal penalty of 25% – equivalent to the bonus.
Like the HTB ISA there is a limit on the price of the property which can be purchased, however it’s £450,000 across the UK – this is not just limited to London.
The problem is that the penalty applies to any unauthorised withdrawals. So, if a buyer wanted to purchase a property which exceeded the £450k limit, they would forfeit their bonus plus a chunk of their own savings.
House prices have risen by 30% since LISAs were introduced, but the thresholds have remained unchanged and there are major concerns it’s preventing some first-time buyers from purchasing a home.
What needs to be done to make homebuying ISAs better for first-time buyers?
The government has now come under pressure to make much-needed changes to the HTB ISA and LISA. In the last week the Building Societies Association (BSA) and The Investing and the Saving Alliance (TISA) have called on the Chancellor, Jeremy Hunt, to remove unfair penalties and outdated rules to schemes designed to support first-time homebuyers.
They want him to reduce the LISA penalty withdrawal fee to 20% to allow savers to retain all of their own savings, while still forfeiting the government bonus.
Meanwhile, they said, equalising the thresholds on both schemes to £550,000 across all regions would ensure house price rises were taken into account enable more buyers to purchase homes.
Robin Fieth, chief executive of the BSA, said: “The Budget on 6 March is a great opportunity for the Chancellor to make small changes that would have a big impact for would-be first-time homebuyers.
“The change to the withdrawal penalty that we are calling for was introduced on a temporary basis during the Covid pandemic and provided much needed support to consumers in that difficult time. That shows it can be done.
“I would urge the Chancellor to re-introduce this on a permanent basis, ensuring the spirit of these savings schemes, which is to encourage young people to start saving to buy their first home, remains intact.”
Advice for Help to Buy ISA savers
If you are saving into a HTB ISA, you can benefit from the slightly better terms of a LISA by switching. The government now allows individuals to transfer funds from the HTB ISA to a LISA free of charge.
As the LISA limit is £4,000, however, you can only transfer this amount per year. Plus you will also be met with the restrictions on the LISA.
