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1 Dec 2019

Help to Buy Isa closes: what next for first-time buyers?

Flagship savings scheme ends after four years - but it's still possible to get a bonus

After four years and almost 340,000 bonuses, the government's Help to Buy Isa scheme has now closed to new applicants.

The good news for savers is that it's still possible to get free cash towards your first home, either by saving in an existing Help to Buy Isa or taking out a lifetime Isa.

Here, we explain the options available to first-time buyers looking for a leg-up onto the property ladder.

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Help to Buy Isanow closed

Since its launch in December 2015, the Help to Buy Isa has offered first-time buyers a 25% bonus on their savings.

Nearly 340,000 people have benefited from a government bonus, with the average amount paid standing at £943.

The scheme has been very popular right across the country, with nearly all regions each seeing at least 20,000 bonuses paid.

And amid talk of a surge in applicants ahead of yesterday's deadline, it seems that there's plenty of life left in the Help to Buy Isa yet.

RegionNumber of Help to Buy bonuses paid
North West45,584
Yorkshire and Humber34,192
West Midlands31,477
East Midlands29,739
South West29,238

Source: HM Treasury. 1 December 2015 - 30 June 2019.

I've got a Help to Buy Isa: what should I do?

It's now impossible to open a new account, but people with an existing Help to Buy Isa can continue to save up to £200 a month until the scheme closes completely in December 2030.

If you're happily saving each month and are looking to buy a house in the next few years, continuing with the Help to Buy Isa could be a good move.

The alternative is to switch your cash into another government scheme - the lifetime Isa - which also offers a 25% bonus on your savings.

Should I switch my savings to a Lifetime Isa?

The first thing to stress is that not all lifetime Isas allow transfers, so you'll need to check the terms and conditions of the individual product.

On the plus side, a lifetime Isa allows you to save up to £4,000 a year, compared with just £2,400 a year in a Help to Buy Isa. This opens the possibility of getting a much bigger bonus.

Unfortunately, there are some drawbacks.

First of all, if you want to withdraw money from a lifetime Isa but aren't buying a house, you'll face a 25% penalty. Our research shows that this not only wipes out the bonus, but also takes more than 6% of your savings on top.

Secondly, interest rates are much worse. The market-leading lifetime Isa only offers a rate of 1.4%, compared with the 3% that was available on a Help to Buy Isa.

This means that unless you're looking to save a lump sum or more than £200 a month, you might be better sticking with a Help to Buy Isa.

Find out more:Which? investigates - is there life in the lifetime isa?

I haven't got a Help to Buy Isa: what should I do?

If you're starting from scratch to save for a house deposit, opening a lifetime Isa is probably the best option, despite the drawbacks mentioned above.

Ultimately, a 25% bonus on your savings when you come to buy a home is money for nothing, and at a time when first-time buyer finances are stretched, it makes sense to take any boost you can get.

Before opening an account, do think carefully about whether you can definitely ring-fence the money for a house deposit, as those withdrawal penalties can really make a difference.

Are lifetime Isa rates about to get better?

The closure of the Help to Buy Isa could theoretically boost the lifetime Isa market, which - in all honesty - is yet to get off the ground.

Right now, there are only 14 accounts on the market: five cash Isas and nine stocks and shares Isas, compared with the 24 Help to Buy Isas that were available.

Paragon Bank launched a new product this week, but other lenders are remaining tight-lipped about what they plan to do.

When Which? approached every Help to Buy Isa provider earlier this month, only 12 replied and none would confirm that they planned to launch a lifetime Isa.

Savings accounts and investments as alternatives

One alternative to using a bonus scheme like a lifetime Isa is to simply save for a deposit in a normal savings account.

Instant-access accounts tend not to have very attractive interest rates, but by locking your money away for several years in a fixed-rate bond you can get a better deal.

If you have a greater appetite for risk, you could look to invest money in stocks and shares instead, but there is always the chance your pot could fall in value.

In truth, if you have the discipline to put money aside specifically for a house deposit, none of these options are as attractive as a Help to Buy Isa or lifetime Isa.

How to get on to the property ladder

It's a tough time to buy your first home, but the truth is that in most areas you don't need a huge deposit to get onto the property ladder.

Cheap 95% mortgages

Right now, mortgage rates for first-time buyers are very attractive, even at 90% and 95% loan-to-value.

And with an increasing number of lenders offering terms of 35 years or more, some first-time buyers will find it easier to pass affordability checks without the need for a massive deposit.

Help to Buy equity loans

Another alternative is the government's Help to Buy equity loan scheme, which is very different to the Help to Buy Isa, despite the similar name.

This scheme allows you to get a 20% loan from the government towards the value of a new-build home, provided interest-free for five years (or indefinitely, if you live in Scotland).

This means you can use a 5% deposit and get a mortgage for the remaining 75%.

Guarantor mortgages

Finally, it can be possible to get onto the property ladder without any deposit at all by taking out a guarantor mortgage.

These deals come with different terms and conditions, but all have an element of risk attached.

That's because guarantor mortgages will always require a parent or family member to lock up savings or use their home as collateral in case you fall behind on your mortgage payments.