When Help to Buy Isas were first launched, you could earn up to 4% interest on some accounts – but rates have plummeted in the two and a half years since, Which? research has found.
Halifax recently announced that all Help to Buy Isa customers would be moved to a rate of 2.25% in August 2018 – a significant cut for those currently enjoying returns of 3.5%, who signed up when the account first launched.
But Halifax is far from alone. As a new initiative, the Help to Buy Isa was billed as a generous way that both banks and the government were helping first-time buyers save for a deposit.
A couple of years on, Which? has found that many Help to Buy Isa rates have been slashed. We look at how rates have changed and explore if there are better ways to save for a deposit.
Why is Halifax cutting its Help to Buy Isa rates?
The recent decision by Halifax will see all Help to Buy Isa customers moved to a 2.25% AER rate, which matches that offered to new customers.
In a letter sent by the bank, existing customers on a rate of 3.5% AER were told: ‘We consider a number of factors when we review and decide our interest rates. As a result, we’ll be reducing the interest rate on your Help to Buy Isa.’
These customers have already seen a reduction from the initial offer of 4% AER at launch.
That said, some customers may benefit from the new policy – those who joined towards the end of 2016 may previously have been on a rate of 2% AER.
When asked about the decision, a Halifax spokesperson told us: ‘We’re simplifying our Help to Buy ISA so that all customers get the same competitive rate of 2.25%.
‘Many customers will see their interest rate increase, and the account will continue to pay one of the highest rates on the market.’
There was also advice that customers could transfer to a different Help to Buy Isa if they wished – but other providers’ rates aren’t much more competitive, our research found.
- Find out more: Help to Buy Isas explained
How have Help to Buy Isa rates changed since they launched?
Of the 23 providers that Which? analysed, more than half have reduced their rates since the product launched, with Halifax slashing them the most (a drop of 1.75%).
Six providers have kept their rates the same, while five have actually offered an increase – Clydesdale Bank, Yorkshire Bank and Newcastle Building Society have all upped rates by 1.05%.
It’s worth noting, however, that the providers who have increased their rates started off low to begin with, and now fall in line with the rest of the market – no provider has increased rates to a market-beating level.
The table below shows the AERs Help to Buy Isa providers first launched with, in comparison to current rates.
As the table notes, some providers are only available in certain areas, due to being smaller building societies that only lend to local residents.
If you happen to have a local building society, you’re probably in luck, as these sorts of providers often have the highest rates. In fact, the Penrith Building Society Help to Buy Isa is now the top of the table, offering 3% AER on balances over £1.
But even this leading rate has been cut by a quarter since the account launched – Penrith’s initial rate was 4% AER.
The nationally available account offering the best rate is the Newcastle Building Society Help to Buy Isa, with 2.56% AER.
The graph below shows how the launch rate compares to the current rate of interest for the nationally-available providers.
As with many other accounts, all rates are variable, and banks are within their rights to change them at any time.
Should I get a Help to Buy Isa?
While the majority of Help to Buy Isa AER rates have dropped, they remain higher than the top rate for instant-access Isas – currently, this is the Al Rayan Bank Instant Access Cash Isa, which has an expected profit rate (EPR) of 1.35% on deposits over £50.
There are some fixed-rate accounts that offer higher rates than some Help to Buy Isas which could be worth considering.
The United Bank UK 5 Year Fixed Rate Cash Isa, for example, offers an AER of 2.65% – a rate which can only be beaten by two Help to Buy Isas, neither of which are available nationally.
However, this account requires an initial deposit of at least £2,000. No additional deposits or withdrawals can be made during the five-year term, meaning you won’t be able to access the money you deposit for five years, and you can’t add to it, either.
What’s more, Help to Buy Isas offer 25% government bonus of up to £3,000 if you use the money to buy your first home.
It’s also worth noting that Help to Buy Isas will no longer be available to new subscribers after November 2019. Existing customers must claim their bonus by 1 December 2030.
If you’re not sure whether a Help to Buy Isa is right for you, the Which? Money Compare comparison tables let you search hundreds of savings and Isa accounts to help you choose the right deal for your circumstances.
- Find out more: How to find the best cash Isa
How do Help to Buy Isas compare to Lifetime Isas?
You also have the option transfer your Help to Buy Isa to a lifetime Isa – a newer government incentive where first-time buyers can save up to £4,000 in each tax year, and receive a monthly 25% government bonus.
This allows you to save more money per year, build up the bonuses during the time you hold the Isa, and – if you decide home ownership isn’t for you – use your lifetime Isa funds towards retirement once you reach the age of 60.
There is, however, only one cash Isa option (from Skipton Building Society), which offers just 0.75% AER.
What’s more, if you want to use the money for anything other than buying your first home or while in retirement, you’ll face a steep 25% withdrawal fee on the sum you’re taking out. This penalty equates to removing the government bonus and any growth it’s earned, plus an additional charge of 6.25%.
- Find out more: Lifetime Isas
How do Help to Buy Isas work?
Help to Buy Isas were launched in December 2015 as a government-backed saving incentive for first-time buyers.
The accounts are all cash Isas, so you’re unable to open or pay into any other cash Isa account in the same year you open and pay into a Help to Buy Isa.
You’re limited by how much you can pay in. You can make an initial deposit of up to £1,200 in the first month, but after that deposits are restricted to £200 a month.
When you want to use the money you’ve saved towards a deposit on your first property, the government will add 25% to your total – this, along with your savings, is paid to your conveyancer or solicitor.
You have to save a minimum of £1,600 before you can use your money towards a house, and the maximum government bonus is £3,000 (which will be paid out if you save £12,000).
You can withdraw your money at any time, as well as transfer it to other accounts and Isas. If you withdraw the money and don’t use it to pay for your first property, or you transfer to a non Help to Buy Isa, you won’t receive the government bonus.
If you transfer to a lifetime Isa, you can only use a government bonus on either the money saved in the Help to Buy account, or the money saved in the lifetime Isa, to go towards your first property.