Why you might soon be unable to use your Help to Buy ISA to purchase a home

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First-time buyers in the UK could soon be priced out of a government scheme aimed at helping them get on the property ladder. According to Hargreaves Lansdown, runaway house prices risk overtaking the limits of the Help to Buy ISA, preventing buyers from benefitting from the scheme when purchasing their first home.

Here’s the lowdown, as well as a look at how first-time buyers can deal with this new development.

How does the Help to Buy ISA work?

The Help to Buy ISA is a tax-free savings account that was launched in December 2015 to help first-time buyers save for a deposit on a home. You can contribute up to £1,200 to the ISA in the first month and £200 each month after that.

In addition to your savings being tax free, the government will boost your contributions by 25% on up to £12,000 of your savings. So, for every £200 you save, you’ll get a £50 bonus. In total, you can earn a bonus of up to £3,000.

As of 30 November 2019, the Help to Buy ISA is closed to new applications. Those who opened their accounts before this date, however, can continue saving into them (until 30 November 2029) and get their 25% free bonus from the government when they are ready to buy.

The Help to Buy ISA can be used for any property worth up to £250,000 (or £450,000 in London).

Why might buyers struggle to use their Help to Buy ISA?

As explained by Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, when the Help to Buy ISA was first launched, the average price paid by a first-time buyer was less than £175,000. As a result, the £250,000 limit gave buyers a lot of leeway to find their first home.

However, house prices have risen dramatically since then, especially in the last two years. The average cost of a first home is now £225,000.

Despite the significant increase in house prices, the Help to Buy ISA limit has not changed. With prices expected to continue rising for the foreseeable future, Coles believes that there may come a time when no one using the scheme will be able to afford a typical starter home.

“It means that people who started a Help to Buy ISA in good faith back in 2015 could get to the point of purchase and realise they won’t get the bonus they were expecting,” says Coles.

How can aspiring buyers cope?

It’s clear that the government needs to seriously reconsider the limits of schemes such as the Help to Buy ISA.

Coles says that the overall limit should be linked to house price inflation. This will help prevent buyers from getting into a scheme where “they could be forced out by a hot property market“.  

Meanwhile, what can aspiring buyers do to avoid being priced out of the scheme?

If you are based outside London and want to buy a house worth more than £250,000, one option is to transfer your savings to a Lifetime ISA. This will allow you to take advantage of the Lifetime ISA’s much higher allowance of £450,000 for homes outside London.

In addition to its higher house price allowance, a Lifetime ISA also has a much higher contribution limit (up to £4,000 per year). As with the Help to Buy ISA, you’ll receive a 25% bonus on your savings (capped at £1,000 per year). 

Note, however, that a Lifetime ISA has strict eligibility criteria that you must meet. For example, you can only open one if you are between the ages of 18 and 39.

What other options are there to save for a home?

Government schemes such as the Lifetime ISA and the Help to Buy ISA can help you save for a home. They are not the only options, however.

For example, aspiring home buyers with a longer time frame to work with (at least five years) may want to look into a stocks and shares ISAs.

Although investing in stocks is riskier, they can provide higher returns over time than cash savings. Furthermore, if you invest using a stocks and shares ISA, any dividends or gains from your investment will be tax free.

If you are interested in learning more, check out the Motley Fool’s comparison of top-rated stocks and shares ISAs.  

Please note that tax treatment depends on the individual circumstances of each individual and may be subject to future change. The content of this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

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