The countdown has begun on the demise of the Help to Buy Isa, as first-time buyers face a six-month deadline to open one or opt for the newer Lifetime Isa savings products carrying lower interest rates.
From November 30 the Help to Buy Isa — a cash savings product that comes with a generous government boost — will be closing to new customers and be replaced by the Lifetime Isa or Lisa, a similar product for first-time buyers or those saving for retirement.
But there are only three cash Lisas on the market, compared with 27 Help to Buy Isas, and they come with much less generous interest rates, leaving prospective first-time buyers with difficult choices.
“I opened a Help to Buy Isa just after my 21st birthday in July last year,” said Jess Pardoe, an executive in digital PR, “and have been getting a 2.5 per cent AER [annual equivalent rate] with NatWest, as well as the 25 per cent government bonus.
“I think it’s a shame they won’t be around any longer. They’re a great initiative to get people on to the property ladder when it’s become increasingly hard to save, and I don’t know as much about the Lifetime Isa.”
The Help to Buy Isa was launched in 2015 and gives first-time buyers a boost of 25 per cent on savings of up to £1,200 in the first month the account is opened and £200 each month after that, up to a maximum contribution of £12,000.
The rates on offer reach as high as 3 per cent in the case of Penrith Building Society (an account only available to Cumbrian residents). Between launch and the end of last year almost 300,000 bonuses had been paid via the Help to Buy Isa, supporting almost 220,000 property purchases.
From November anyone seeking government help when getting on to the housing ladder will have to opt instead for a Lifetime Isa, a new kind of Isa launched in 2017 which does a similar job to the Help to Buy Isa and is also available to stocks and shares investors.
But providers have been slow to launch Lisas. A handful of companies offer stocks and shares Lisas including AJ Bell, Hargreaves Lansdown and the Share Centre, and even fewer offer cash Lisas.
Laura Suter, personal finance expert at AJ Bell, said: “This lack of competition is hitting savers’ pockets, as the top Help to Buy Isa interest rate is 3 per cent, compared with the top Lifetime Isa that pays 1.1 per cent.”
Newcastle Building Society, Skipton and Nottingham Building Society are the only providers to have launched a cash Isa. Newcastle offers the highest rate, at 1.1 per cent AER compared with a rate of 2.58 per cent from a Barclays Help to Buy Isa, according to Moneyfacts.
“With the Help to Buy Isa’s days numbered we would hope that providers are working behind the scenes to launch a Lifetime Isa later this year, which in turn will boost take-up among first-time buyers and lead to a healthier market,” Ms Suter said.
But providers say they are unlikely to launch cash Lisas. NatWest, Nationwide and Barclays all said they had no plans to offer one.
Customers can still open a Help to Buy Isa until November, and anyone with a Help to Buy Isa will be able to continue paying in until November 30 2029. They will have until December 1 2030 to claim their government bonus.
Alternatively, customers can transfer into a Lisa, which carries some advantages over the Help to Buy Isa but comes with drawbacks too.
Customers are able to save up to £4,000 a year into a Lisa, and can save lump sums instead of a monthly amount. Someone contributing the maximum from age 18 until age 50 could earn a far higher government bonus of between £32,000 and £33,000 depending on their age. This calculation is based on £4,000 a year in customer contributions and £1,000 in bonus for 32 years.
That compares with a maximum £3,000 bonus for the Help to Buy Isa, which caps customer savings at £12,000.
But Lisa customers also face a hefty exit penalty equivalent to a quarter of the pot built up if they withdraw the funds for anything but: a first home; retirement (before the age of 60); or as a result of a terminal illness.
Sarah Coles, personal finance expert at Hargreaves Lansdown, said customers should make sure to decide between the two products now.
“If you were to open a Help to Buy Isa and then want to move to a Lisa further down the line, any money you transfer would use up that year’s Lisa allowance, so it’s sensible to make a decision between a Help to Buy Isa and a Lisa that you can live with until you buy your first property.”