Prospective first-time buyers saving towards a deposit can take advantage of a new scheme designed to give their finances a lift next week. Help-to-buy Isas, available from Tuesday, give couples stepping on to the property ladder a tax-free bonus of up to £6,000, with interest rates of up to 4% on offer.
“This is a welcome boost in a tough process, especially when house prices continue to climb in some areas at a quicker rate than buyers can save,” says David Hollingworth from broker London & Country. Here’s what you need to know.
What are help-to-buy Isas?
Similar to normal cash Isas, they enable savers to benefit from tax-free interest, with providers setting their own rates and rules on withdrawals. However, for every £200 saved in a help-to-buy Isa the government will top up the account by £50 – up to a total bonus of £3,000 per person (the minimum is £400). The money can be put towards the cost of buying a home worth up to £250,000 (£450,000 in London). Accounts can be opened any time within four years of 1 December with an initial contribution of up to £1,000, and maximum monthly contributions of £200. You must claim your bonus by 2030.
How is the bonus paid?
When you are ready to buy a home your bank or building society will give you a closing letter. You give this to the solicitor you are using to buy your home and they will be able to apply for the bonus to put towards completion. The solicitor can charge up to £50 plus VAT to process your bonus payment.
Any catches?
If you have already paid into a cash Isa this financial year you may have to wait until April 2016 to open a help-to-buy Isa. Typically, only one Isa can be opened each tax year.
However, some providers will let savers hold both a cash Isa and a help-to-buy Isa. “Nationwide and Newcastle building societies are among those that will let you have both within the same Isa wrapper, provided your total savings don’t exceed the annual tax-free savings limit of £15,240,” says Andrew Hagger from website MoneyComms.
Where can I get one?
Accounts will be available from high street banks and building societies. So far 14 providers have signed up, including Virgin Money, Nationwide, NatWest, Barclays, Halifax, Lloyds and Bank of Scotland. Most rates have yet to be announced, although Halifax says it will pay 4%, and NatWest 2%.
What is the criteria?
Provided you don’t already own or pay a mortgage on an existing property, you can apply. Otherwise, eligibility rules are similar to any other cash Isa, and you must be at least 16.
If you are looking to buy as a couple, you can open separate help-to-buy Isas, potentially giving a £6,000 bonus.
Should I definitely get one?
Yes, otherwise you are effectively turning down free money. “The bonus structure is far more rewarding than any standard savings account,” says Hagger. Even if you aren’t considering buying a home at the moment, keep an eye on interest rates. If you’ve never owned property before they could be a good way of grabbing a top rate. You can use it as a general savings account, and if you do decide to buy you’ll have the added benefit of the bonus.
How long will it take to get the full bonus?
You need to save £12,000 to get the full £3,000. Given the £200 monthly limit, you will probably need to save for more than four years to reach that sum. The time taken depends on the interest rate offered. If, for example, you pay in £1,000 initially, then £200 a month and get a rate of 2%, you would reach £12,000 after four years and five months.
I’m planning to buy in three months. Is it still worth it?
Yes. This still gives you time to pay in the initial £1,000 lump sum and make three £200 monthly payments. This will amount to £1,600, entitling you to a £400 bonus. If there are two of you buying for the first time and you save £1,600 each then your bonus will be £800.
What if I ultimately don’t use the money to buy a house?
If you need the money for something else you can withdraw it. You’ll have earned interest on your money but the bonuses are only paid towards a house deposit through a solicitor.
Are there any other schemes?
Help-to-buy Isas can be used alongside other schemes on offer, including:
■ Help-to-buy equity loans Borrowers need to raise 5% of the value of a new-build property, but can borrow a further 20% on an interest-free basis from the government. The loan is repaid when the property is sold.
■ London help to buy The same as the government’s existing scheme, but offering loans of up to 40% of the value of the home. Buyers will need to take out a mortgage for up to 55% of the property’s value to cover the rest.
■ Shared ownership Following changes to salary thresholds in the autumn statement, shared ownership properties will be available to households earning less than £80,000 outside London and £90,000 within the capital.
■ Mortgage guarantee A government guarantee on mortgages of up to 95% loan-to-value. This scheme is set to end in 2016.
‘This can make a difference’
Mortgage adviser Michael Fowler, 31, will pay into a help-to-buy Isa as he looks to buy a property. He currently rents a one-bedroom flat in Bath with his girlfriend at £650 per month plus bills. “We’ve been looking to buy for around 18 months, but we’ve seen prices soar from around £170,000 to north of £200,000 for a one- or two-bedroom flat during this time, which is disheartening,” he says. “Ideally we’d like a deposit of 10%-15%, but it’s more likely to be 5%.”
Fowler has no parental help, so he is keen to maximise his savings. “Friends have used the help-to-buy equity loan, so these schemes can make a real difference.”
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