Buying your first home – the Help to Buy ISA
It’s fast becoming the impossible dream for some. Getting your foot on the property ladder or perhaps helping your children to do so is becoming a real financial stretch, particularly with all the other demands on your budget. Just saving fo the deposit is bad enough, let alone securing a mortgage once you’ve found your dream home.
Government help is at hand
But there is some good news if you’re just starting out. First time buyers can still take advantage of the government’s Help to Buy ISA and by doing so the government will boost your savings by 25%. So that’s a free £50 for every £200 you save, up to the tune of payments of £3,000 on savings of £12,000.
You do need to save at least £1,600 in order to get the minimum top up of £400 and of course to receive the maximum of £3,000, you need to have saved £12,000.
What’s more, the ISAs are available per buyer and not per household which means couples buying together could each take advantage of this government top up to the tune of £6,000 between them. That’s not a bad start to your saving regime.
However, if you haven’t started you need to act fast as the scheme closes on the 30th November 2019 and won’t be available to new savers after that date. If you’ve already started saving by the closure date, you can keep saving into your account. The government top up payments must be claimed by 1st December 2030.
Interest
Your top up will be calculated on the basis of the money you’ve saved, and the interest earnt since you opened your ISA. You won’t earn interest on the government top up.
A few minor restrictions
The money cannot be used towards the initial deposit, conveyancing costs or other fees and has to be part of the sums paid on completion of the purchase, thereby slightly reducing its appeal.
The reason is that the concept behind it is that you’ll need to borrow less by way of a mortgage. You also need to instruct your solicitor or conveyancer to apply for the payments once you’re near to completion (and bear in mind this may incur a small fee).
You do have to be over 16 and a first-time buyer and the property must be valued at £250,000 or less (£450,000 in London). And you cannot use the Help to Buy ISA to fund the purchase of an overseas property or a buy to let.
You can’t take out a Cash ISA and a Help to Buy ISA in the same tax year although it is OK if you have a Cash ISA from a previous year (and some providers will let you save into a cash ISA and a Help to Buy ISA within the same ISA wrapper). However, the standard cash ISA and Help to Buy ISA allowance limits will still apply, and you may find that you get lower rates this way and therefore it’s not worth it.
Getting started
Open your Help to Buy ISA as soon as possible. You can get started with an initial deposit of up to £1,200 and in order to take advantage of the full amount (and because you are limited to saving £2,400 p.a. plus initial deposit), it will take you about 4½ years to claim the full government top up payments.
Interest and schemes
You won’t receive interest on the government payment and what interest you receive on your own savings may vary from one provider to another so shop around. There are lots of comparison sites available to help you do so. You can also switch between providers to ensure you take advantage of the best interest rates but do so with care. You don’t want to accidentally withdraw funds rather than transfer them and there are rules that you need to comply with.
If you decide not to buy (or buy somewhere more expensive than the threshold allows) you won’t lose your money which you can withdraw tax free and with any interest due. You just won’t get the government top up.
Other considerations
You can save a lot more each year with a normal Cash ISA but you won’t qualify for the government top up. From 6th April 2016 basic rate taxpayers have also been able to earn tax-free interest up to £1,000 in respect of a normal savings account (or up to £500 if you pay higher rate tax) and you can do that in tandem with your Help to Buy ISA.
A new Lifetime ISA was launched on 6th April 2017 which also provides for a top up payment of 25% but allows you to save more per year. You can have both but you’ll only get the top up payments on one.
It’s not often you get something for nothing, particularly from the government, so if a house purchase is on your radar within the foreseeable future, it’s well worth taking a look. Alternatively, take advice on other tax efficient methods and how family members may be able to help. But whatever you do, don’t lose out unnecessarily on some free government help.
