Property prices that are stratospheric – and climbing onto the first foot on the property ladder a challenge, even when the bank of Mum and Dad is prepared to be generous. The Government’s Help to Buy ISA is designed to make that first step a little easier, by providing a tax-efficient way to build up the necessary deposit.
But that’s not all. The Help to Buy ISA provides a way not only to save for a deposit tax-free, but to boost those savings with a 25% bonus – up to £3,000.
Free money from the government?
As with traditional Cash ISAs, interest on Help to Buy ISAs is free of both income and capital gains tax. However, when an individual takes money out to buy a home, the government will add 25% to whatever is in the account, up to a maximum of £3,000. Anyone buying with a partner could receive a government bonus of up to £6,000 towards their first home.
It’s a generous offer, so naturally there are strict limits. Help to Buy ISAs are only available to potential first time buyers. They must be a UK resident, and never owned a property anywhere in the world. The property must be purchased with a mortgage. It cannot be a second property, or for buy-to-let. There are restrictions on cost too – the maximum purchase price is £250,000, or £450,000 in London.
The conveyancer will apply for the bonus when a property is purchased. If there is no house purchase, savings will continue to earn interest, but without that very appealing bonus.
Investment is limited to an initial £1000 (which can be a transfer from an existing cash ISA) and £200 per month. So savings will build slowly. Without interest, it would take more than four and a half years to save £12,000 and get the maximum bonus. Of course, with interest, things go a little faster – and whatever the rate offered, the bonus will ensure the Help to Buy ISA is likely to beat any other cash ISA.
How to get started with a Help to Buy ISA
You can shop around for the best rates. Many of the high street banks and building societies offer them – recognising they are a very good way to attract mortgage customers when the time comes. Virgin Money, Aldermore, NatWest, Nationwide, Santander and Barclays have all entered the market, and you can get a very attractive 4% interest rate if you look around – which is particularly rewarding in the current climate.
You can keep your Help to Buy ISA open and contribute for as long as you like, but the scheme will be closed to new savers on November 30 2019, with all bonuses to be claimed by December 2030.
What about Lifetime ISAs?
The lifetime ISA (LISA) is a new government initiative that works in much the same way as the Help to buy ISA. The bonus rates are the same, and you can still take your savings plus bonus out when you are ready to buy. Where it differs is that you can alternatively just keep contributing until you reach the age of 60, when it should come in as a very useful retirement fund.
Can’t wait 4 years?
Waiting four years to get the maximum bonus could mean house price inflation purchase prices cancel out any benefit from a Help to Buy ISA.
However, the minimum £400 bonus is in reach within three months, the time frame of the average house purchase. Anyone with a lump sum saved to pay a deposit and other fees could place £1,200 in a Help to Buy Isa and make £200 contributions in the next two calendar months, and enjoy that £400 extra.
If a sale goes through more quickly and a buyer needs the money before they reach the minimum bonus, they can simply close the ISA. They would only have lost the savings interest that would have otherwise accrued, certainly less than £10.
An extra £50 for every £200 saved makes the Help to Buy ISA look like a very good plan for anyone who is not already a homeowner. Of course, there are several schemes to choose from, and you should always have professional advice before making any kind of financial plan. Perhaps the best first step to get on the property ladder is to contact us for some professional advice.
You may find our recent blog “What The Lifetime ISA Means For You” useful.
Remember your home may be at risk if you do not keep up with the repayments for a loan or mortgage secured on your property.
The Financial Conduct Authority does not regulate taxation and trust advice.
Levels and bases of reliefs from taxation are subject to change.