- Interest rate gap of 2.34% between best Help to Buy ISA and Lifetime ISA rates
- Wannabe homeowners missing out on £160 million a year in lost interest
- 2.2 million people hold Help to Buy ISAs worth £5.5 billion
- Help to Buy ISA holders can switch to a Lifetime ISA to access more competitive rates, an upfront bonus and higher contribution limits
“Savers building a deposit for their first home could be missing out on more than £160 million in lost interest a year,” says AJ Bell director of personal finance, Laura Suter. “With cash sat in Help to Buy ISA accounts earning considerably lower interest rates than Lifetime ISA (LISA) rates available, it could be time to think about switching to get a better deal.
“There are 2.2 million Help to Buy ISA accounts still held by aspiring homeowners, worth around £5.5 billon. With an interest rate gap of 2.34% between the best paying Help to Buy ISA and the top rate on Lifetime ISA cash through AJ Bell Dodl, it means wannabe first time buyers are missing out on a huge sum in lost interest each year*.
“Help to Buy ISAs have been closed to new customers for a number of years, with rates of interest dwindling in contrast to Lifetime ISAs. Although the accounts can continue to be held and used to buy a house until the end of the decade, they’re now a legacy product superseded by Lifetime ISAs. So it’s no shock that the Help to Buy ISA market appears to have grown less competitive over time as a result.
“If you already hold a Help to Buy ISA it’s important to shop around and make sure you’re getting a good deal, rather than leaving the money idling in an account that may be paying a substandard interest rate. At the time of writing, the best Help to Buy ISA rate available to all customers currently stands at 2.75% AER, while the maximum 3.5% is on offer only if you bank with HSBC*. In contrast, you can get over 5% on cash in a LISA and savers might want to look at switching to get a better deal. AJ Bell’s own Dodl app pays 5.09% AER variable on cash held in its Lifetime ISA accounts.
“Moving a Help to Buy ISA to a Lifetime ISA is relatively straightforward. The principle behind them is similar, with a government top-up available for those who pay in and use the account to buy a first home. There are a few additional perks with a Lifetime ISA though, like the larger annual contribution limits, an upfront bonus meaning you earn interest on both your own savings and the top-up payment, plus a higher ceiling on the maximum property price for homes outside London.
“The government has made homeownership a clear priority, promising to turbocharge housebuilding and make the dream of getting on the property ladder a reality for people up and down the country. That is no small task, but prompting people to shop around for a better deal on Help to Buy ISA savings could give a boost to the market without the cash-strapped chancellor having to find any additional money in her red box.
“If she wanted to go a step further, small changes to the LISA market could make the savings tool more attractive to first time buyers.
“Ditching the punitive exit charge on LISAs by reducing the early encashment charge to 20% so that it reflects only the original bonus would make the product more appealing. Likewise, raising the maximum property purchase price limit should be under consideration, since it has remained unchanged since 2017.”
Help to Buy ISA vs. Lifetime ISA
“Help to Buy ISAs and Lifetime ISAs are similar, but there are some key differences. Help to Buy ISA holders can pay in up to £200 a month (£2,400 annually) and get a 25% bonus on the money when it’s used to buy a first home. LISA holders can contribute £4,000 annually, but the 25% bonus worth up to £1,000 a year is paid upfront, so savers earn interest on the government top-up.
“The catch is that an exit penalty of 25% then applies if the money is withdrawn early from a Lifetime ISA, rather than used to buy a property. Alternatively, Lifetime ISA money can be held for the long term and withdrawn after age 60. It means if someone paid in £4,000 in a year and got the £1,000 government bonus, and then withdrew the entire £5,000 (not allowing for any interest earned), they’d pay an exit fee of £1,250 – losing £250 of their own money on top of the whole government bonus.
“Lifetime ISA holders can benefit from £1,000 a year upfront bonus when they pay in the maximum £4,000. There’s no cap on how much money you can build up within the limits of the Lifetime ISA’s age rules, whereas the maximum Help to Buy ISA handout from the government is £3,000.
“There’s also a higher ceiling on the maximum property price outside London – up to £450,000 when using a Lifetime ISA, compared to £250,000 with a Help to Buy ISA (although the higher £450,000 cap applies in London).
“Both a Help to Buy ISA and LISA can be used by first time buyers to purchase a property they plan to live in. They must be taking out a mortgage to buy the property.
“It’s possible to hold both a Help to Buy and Lifetime ISA but you can only claim the bonus on one when purchasing a property, so it’s normally better to switch rather than just open a separate account. There are a few things to consider if you’re thinking of switching to a Lifetime ISA.
“An important consideration is when you want to use the money. There’s an annual limit of £4,000 on the amount you can pay into a Lifetime ISA, including money switched from a Help to Buy account. If you’ve got a large balance you may not be able to move it all in one go, so make sure you’ve got enough tax years in which to switch the money before you need to take it out. Although, with the average Help to Buy account worth around £2,500, most people could switch straight away.
“Likewise, you need to have held the money in a LISA for at least a year before you use it to buy a home. So you can’t switch just before you want to put down your deposit on your first property.”
*Best Help to Buy ISA rate available to anyone is 2.75% AER variable at the time of writing, according to Money Saving Expert (3.5% rate available, but restricted to existing HSBC customers only). Best rate on LISA cash 5.09% through AJ Bell Dodl. There are 2.2 million Help to Buy ISA accounts in circulation, worth approximately £5.5 billion. Switching the total from 2.75% to 5.09% AER generates an additional £160,875,000 annually.
