Got a question about your savings? Email in and we’ll get one of our experts to reply. Anna Bowes, co-founder of Savings Champion, has given her guidance to a reader below. If you have a question for our experts, email us at [email protected].
This week’s question: “I persuaded my son to open a Help to Buy Isa back in 2019. He was only 18 at the time, but the government bonus you get for a house deposit sounded like a great deal and I wanted him to get one before they closed to new customers. The rate on his Isa is now pitiful compared to some of the best available and I’m wondering if he should switch away to different account paying better rates. On the flipside, I’m also concerned that if he does so he’ll lose a chance to get the bonus and won’t not be able to get a Help to Buy Isa again given they no longer exist. Can you give any guidance?”
Anna replies: It’s great that you identified the opportunity for your son to open a Help to Buy Isa (H2B), and it’s also great that you have recognised that the interest rate is poor and that you could do better.
The H2B Isa – which tops-up savings of those looking to buy their first home – has been closed to new applicants for a number of years now, but if you already hold one, you can continue to contribute, and you can claim a government bonus of 25 per cent when buying until 2030.
However, while the H2B Isa was the best product you could have chosen at the time, it has since been superseded by the Lifetime Isa (Lisa), which in many ways is a better product and also provides a bonus to those buying a home for the first time (as long as they meet certain rules). The good news is that your son can transfer some or all of his H2B Isa if that is appropriate.
Firstly, let’s take a look at the differences between the two products.
H2B Isa vs Lisa – how much you can save
One massive difference is the amount you can deposit and therefore the amount of government bonus you can potentially receive. You can only deposit £200 a month into the H2B Isa, compared to £4,000 a year into the Lisa – this means you can earn a bonus of up to £1,000 a year with the Lisa, but just £600 a year with the H2B Isa (both offer a bonus of 25 per cent).
And you can only earn the 25 per cent bonus on the first £12,000 in the H2B Isa. With the Lisa you could earn up to £33,000 bonus if you were to deposit the maximum £4,000 every year from the age of 18 until age 50 (which is the age at which you can no longer contribute).
It should be noted that the £4,000 Lisa allowance (and the £2,400 H2B Isa allowance) is part of the overall maximum Isa allowance of £20,000 – so you can only deposit this much if you have not used your Isa allowance up elsewhere.
The other benefit of the Lisa is that the 25 per cent bonus is added to the account the month after any deposit is made, which means you can earn interest on it, as well as the deposit. The bonus on the H2B Isa, on the other hand, is simply added at the point you complete on your first property.
The Lisa does have its downsides
But while it looks as though it is clearly the best decision to switch to the Lisa, if your son is planning to buy his first home within 12 months, the Lisa is not the way to go, as you have to hold the Lisa for a year before you are eligible to use the bonus.
Another important point is that with the H2B Isa, if your son decided not to use the money to buy his first home, he can simply close it and take the proceeds, including any interest earned – although he will forgo the bonus.
But if he holds a Lisa, if he were to close it before the age of 60 for anything other than his first home, there would be a penalty of 25 per cent of the amount withdrawn. Although this would seem to simply be a return of the government bonus, it actually works out to be a extra penalty of roughly 6.25 per cent that will apply. So as well as losing the bonus, some of the money he had deposited would also be taken.
Taking the above information into account, if your son decided to transfer from his H2B Isa into a Lisa, if the amount in the former is more than £4,000, it will take some time to transfer the whole amount as the maximum deposit is £4,000 a year and that includes any money transferred from the H2B Isa.
Better interest on LISAs
Another potential nail in the coffin for the H2B Isa is that you can also earn a higher interest rate from the top cash Lisas compared to the top H2B Isa that you could switch to. At the time of writing, the best H2B Isa that you could transfer to is with the Halifax and is paying a variable rate of 2.45 per cent. The top Lisas on the other hand, are paying as much as 3.50 per cent (this is via the moneybox app – but the underlying provider is Santander) – although this does include a bonus of 0.75 per cent for the first year. A bonus on a savings account is actually more akin to an enhanced rate which, on this occasion, only lasts for 12 months.
If you decide to transfer, approach the new provider and complete a transfer form when you open the Lisa. They will then process the transfer for you.
There are a few other differences between the Lisa and the H2B Isa in terms of the property you can buy – so it’s important to read the rules on Lisas and H2B Isas first. But in any case, it looks as though he could be earning more interest if he either were to switch to another H2B Isa or a Lisa.