'Inflexible' Help to Buy ISAs less popular in expensive areas, but is one right for you?

Tuesday, 30th July 2019, 17:00 pm
Updated Wednesday, 31st July 2019, 16:59 pm

A Government scheme has struggled to get people onto the housing ladder in areas where they need help the most, new analysis shows.

Help to Buy Individual Savings Accounts (ISAs) give first-time buyers a 25 per cent Treasury bonus on cash they save for a mortgage deposit, worth up to £3,000.

But since their introduction in 2015, they have seen double the rate of use in the North of England than in the pricier areas of London and the South East, analysis by the JPIMedia data unit reveals.

With the initiative due to close to new account-holders in November, a charity is calling on the Government to ditch “piecemeal schemes” and invest in social housing instead.

'Totally unaffordable'

Polly Neate, chief executive of Shelter, said: “At Shelter we know that for many working families the South East and London are now totally unaffordable to private rent or buy.

"Piecemeal schemes like Help to Buy aren’t the answer, we need to see ambitious investment in social housing if we’re going to tackle the housing crisis.”

Help to Buy ISAs have proved less popular in the expensive South East, analysis shows. Photo: Shutterstock.

There were 62 homes bought through Help to Buy ISAs for every 10,000 people of working age in the North of England, analysis shows.

In London and the South-East, this rate was just 29.

The scheme can only be used to buy a home worth up to £250,000, or £450,000 in the capital, but nearly three-quarters of council areas in London and the South East have average house prices which exceed this limit.

There are also tight restrictions on how much savers can put away each month, with the resulting Government bonus worth on average just £899 per person.

Case study: 'I was so sick of paying other people's mortgages'

Hannah Lennox, 34, lives in Midlothian, Scotland, with her partner John Cooper, 35, and their two children Benji, 4, and Nora, 1.

Hannah, a midwife, and John, a subpostmaster, both opened Help to Buy ISAs to save up for their first home.

Hannah Lennox used a Help to Buy ISA to buy a home. Photo: Lisa Ferguson.

Midlothian is a particularly popular area for those buying through Help to Buy ISAs, with house prices lower than the UK average and good transport links into nearby Edinburgh.

Hannah said: “I had been renting for 12 years, since I was 20.

"I was so sick of paying other people’s mortgages. We were paying over the odds to rent.

"The flat we were in at the time was half the size of the house we own now, but we were paying £250 more a month for it.

“When Benji turned one I thought, ‘I’ve had enough’.”

In the summer of 2016, Hannah and John each opened a Help to Buy ISA. By spring 2017, they had saved a combined £5,000 and qualified for 25 per cent Government bonuses on top.

They had also been putting money aside in other accounts.

They bought a new-build three-bed semi for £200,000 using another branch of the Help to Buy scheme: mortgage assistance from the Scottish Government which meant they only had to put down a 5 per cent deposit.

Hannah said: “It was lovely finally having our own house and having everything the way we wanted it.

"The Help to Buy ISA was really easy to set up and I did it all through online banking. I have recommended it to lots of the girls from work.”

'Quite limited'

James Chidgey, relationship manager for the Mortgage Advice Bureau, said it was not surprising that Help to Buy ISAs had seen less use in areas with more expensive housing.

He said the product was “fairly inflexible and quite limited from a savings perspective”.

James Chidgey of the Mortgage Advice Bureau. Photo: MAB.

But he said those saving for a first home could instead consider the Lifetime ISA.

It also gives a 25 per cent Government bonus on savings for a first home, but offers greater flexibility in some respects.

This includes being able to save more per year and being able to buy a house worth up to £450,000 anywhere in the UK.

Mr Chidgey said the Lifetime ISA’s bonus could be worth up to £1,000 each year.

He said: “If two people are buying together and have separate ISAs, this bonus will be even more significant, and in the space of a few years may mean a couple could have a meaningful deposit for a property.

“It’s important to note that the Lifetime ISA is geared towards people who aren’t in a hurry to purchase their first property as you must have held the account for at least 12 months to receive the 25 per cent bonus.”

'Hugely popular'

A spokesman for the Treasury said: “The Help to Buy and Lifetime ISAs have been hugely popular with first-time buyers.

“More than 218,000 property completions have been supported through the Help to Buy ISA and 330,000 Lifetime ISA accounts have been opened since its introduction, helping more people to get on the property ladder and save for later in life.

“These ISAs, like all tax policy, are kept under constant review.”

In June, the National Audit Office criticised another branch of the Government’s Help to Buy initiative, which provides equity loans for first-time buyers purchasing new-build houses.

Its report said take-up had “been low in less affordable areas” and that many of those using the scheme would have been able to buy a home anyway.

Help to Buy ISA vs Lifetime ISA - which is right for me?

We put the two first-time buyer savings schemes head-to-head.

Help to Buy ISAs and Lifetime ISAs may sound similar, but there are some key differences. Photo: Shutterstock.

What can I use the account to save up for?

Help to Buy ISA: You can put it towards your first home, which must be worth up to £250,000, or £450,000 in London.

Lifetime ISA: First-time buyers can use it to buy a home worth up to £450,000 anywhere in the UK. Whether you’re a first-time buyer or not, you can also save for your retirement. But be warned, there is a financial penalty if you take out your money before the age of 60, unless it is to buy your first house. This means you could get back less than you paid in.

Who can open one?

Help to Buy ISA: You can open one if you are over 16, a first-time buyer and a UK resident. But you will have to be quick, as the scheme closes to new account-holders in November. You then have until December 2030 to claim your Government bonus.

Lifetime ISA: You must be a UK resident aged 18 to 39.

How much can I save?

Help to Buy ISA: You can start your account off with a maximum lump sum of £1,200 and save up to £200 a month.

Lifetime ISA: You can put in up to £4,000 each year until you are 50.

What is the Government bonus worth?

Help to Buy ISA: The Government tops up your savings by 25 per cent, but this is capped at £3,000 per person. The minimum bonus is £400, so you won’t get any free cash if you have saved less than £1,600 yourself.

Lifetime ISA: Again, it’s a 25 per cent bonus, but it can be worth up to £1,000 each year. So someone opening an account at 18 and paying in the maximum amount each year until they are 50 could get a bonus worth £32,000. There is no minimum amount you need to save to get a bonus.

When do I get the free cash?

Help to Buy ISA: You only get the bonus once you buy a house. This means it only counts towards your mortgage deposit (reducing the amount you need to borrow) and not your exchange deposit (the cash you give to the seller beforehand to reserve the house).

Lifetime ISA: You need to have had an account for at least a year before you can use it to buy a house. The bonus is paid monthly - this means you can use it towards both your exchange deposit and mortgage deposit.

I’m buying a home with someone else, can we each use an ISA to save for it?

Both Help to Buy and Lifetime ISAs: Yes, as long as you are both first-time buyers, you could each get a Government bonus towards your home. ISAs are individual products so you would have one each, rather than a joint account.

Can I have both a Help to Buy and Lifetime ISA?

Yes you can, but you can’t get two Government bonuses towards a first home. This means you can have a Help to Buy ISA to save for a house and a Lifetime ISA to save for retirement.

See the full dataset behind this story here.