December sees the launch of a government savings scheme designed specifically to help people save for a deposit on their first home. Richard Sexton, director of e.surv chartered surveyors, explains all you need to know about the Help to Buy ISA
The economic gloom of the recession is lifting and many families are seeing their finances recover. First-time buyers in particular have seen their fortunes change for the better over recent months. Mortgage rates are still at record lows, inflation remains negligible, while those in work are finally feeling the benefits of wage rises. Crucially too, lenders are offering a host of affordable options to help borrowers with smaller deposits get onto the housing ladder. This means now is a good time for many to climb onto the property ladder.
However, the difficulty in saving up a deposit is still curbing first-time buyer numbers, especially with savings rates relatively low. Rising house prices are adding more pressure, as aspiring homeowners are having to put away larger sums to qualify for a mortgage.
Thankfully, new help is at hand. The government’s new Help to Buy ISA (individual savings account) is the latest initiative designed to help homebuyers save for their first home. Here’s what you need to know about the new scheme.
The ISA, first announced in March’s emergency budget, is available from 1 December 2015. This is a new, tax free, savings account, aimed specifically at aspiring first-timers, which will be topped up with an extra cash bonus from the government. You can save up to £200 every month in the ISA, for which you will gain an extra 25% bonus. So that’s a potential extra £50 for each month you save.
In total, you can save £12,000 in the ISA, for which you will receive a government top-up of £3,000, giving you a grand total of £15,000 to put towards your deposit.
It will take you a while to get the full bonus though. If you deposit the maximum amount each month you’ll still have to wait over four-and-a-half years (55 months) to get your £3,000, so the account won’t be ideal for those in a hurry.
But, if you aren’t in a rush to buy, there’s no limit on how long you can keep your account open, so you can earn the maximum bonus in your own time.
The scheme will be available for the next four years, so you will need to open the account before December 2019 at the latest.
The small print
If you’re considering the ISA, there are a few conditions you will need to understand before opening an account.
First and foremost, you will only receive the top-up when you purchase your first home, meaning the money must only be used to get a foot onto the property ladder.
Second, there are also caps on the price you can pay for your property – the ISA will only be available to first-time buyers purchasing homes worth up to £250,000, although this is almost double the average price of a first home according to Your-Move and Reeds Rains’ latest first-time buyer research. If you are buying in London the threshold is slightly different – the home you are purchasing must cost less than £450,000 to be eligible for the scheme.
Thirdly, the bonus goes directly to your mortgage provider rather than your own account, meaning you can’t earn interest on it or access it until you purchase a house. However, the bonus is tax exempt and it’s paid based on both the amount you save and the interest on your savings.
And finally, to open a Help to Buy ISA account you need to have saved an initial £1,000. This does mean that you can qualify for decent-sized top-up from the government after having the account for just one month – if you open the account with £1,000 and save the maximum £200 in your first month, the 25% top up is equivalent to £300.
However, there is an added level of complexity here, as you need to save at least £1,600 before you qualify for any bonus when buying. You can claim as soon as you’ve saved this, although you would only have £2,000 for your deposit which won’t go far with current house prices.
How to get the best deal with Help to Buy ISAs
If you’re in a couple, you and your partner can both open a Help to Buy ISA account to help save at double speed. If both partners open their own account, you will also qualify for double the bonus, meaning you can get a maximum bonus of £6,000 with combined savings of £24,000.
To put this into context, Your Move and Reeds Rains’ latest research on first-time buyers shows that the average first-time buyer deposit was £25,948 in September, so the bonus scheme could account for a large part of your final deposit.
You should also seek out the best deal. The ISA will be provided through banks and building societies, meaning along with the government’s 25% top up, you can also earn interest on your savings. As there will be plenty of providers, it’s important to search for the best offers.
While you can continue to earn interest on any income you pay into the ISA, you might want to consider having a top rate savings account too.
Which banks and building societies offer the Help to Buy ISA?
As Help to Buy ISAs will be managed by banks and building societies, normal ISA rules will apply. This means providers will offer different interest rates and there are the usual ISA withdrawal rules. However, you will be able to transfer your account between different providers, so you can move around to get the best deal.
Currently, several banks and building societies have confirmed that they will be providing Help to Buy ISAs. From 1 December, the institutions that have already announced they will be participating in the scheme are as follows:
- Barclays
- Halifax
- Lloyds
- Nationwide
- NatWest
- Santander
- Virgin Money
- Leeds Building Society
- Newcastle Building Society
- West Bromwich Building Society
While most of these banks and building societies are yet to reveal the savings rates they’re offering, Nationwide has confirmed that it will be paying interest on savings. The Newcastle Building Society has already said that it will give savers an additional £1,000 as well as the government bonus through their own Help to Buy product when savers sign up for a Help to Buy ISA. This underlines the importance of shopping around for the best deal, as lenders jostle for first-time buyer business.
What are the drawbacks?
You should be aware that you can’t pay into both a Help to Buy ISA and regular cash ISA in the same tax year. This means if you have already paid into a normal ISA this year, you will need to wait until 6 April 2016 before you can open a Help to Buy ISA account.
It’s also worth noting that the amount you can save in the Help to Buy ISA is considerably lower than a normal Cash ISA. You can save up to £2,400 a year compared to £15,240 in a Cash ISA. However, it is still one of the most profitable ways to save for your new home.
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Financial support already available for first-time buyers
The new Help to Buy ISA isn’t the only scheme helping people purchase property.
There are already two government schemes to assist first-time buyers with getting a foot on the property ladder, both part of the Help to Buy campaign. These schemes have so far been successful, helping over 83,000 people purchase their first properties. But the new ISA provides a further boost as you can use it with both existing Help to Buy schemes to help make buying your first home much more affordable.
Mortgage Guarantee
Of the established Help to Buy schemes, the most popular is the Mortgage Guarantee scheme. This allows first-time buyers to purchase their home with a deposit as small as 5% of the total value of the property.
The scheme works like a regular mortgage, but the government offers lenders the option to purchase a guarantee. Because this lowers the risk for lenders, they are able to offer far more high loan-to-value mortgages. This means that you can get a larger mortgage with a smaller deposit, while still having affordable repayment rates. The scheme helps with the purchase of all properties worth up to £600,000, so it should cover the homes in your budget.
Equity Loan
However, if you are planning on buying a new-build home then the Help to Buy Equity Loan scheme may be a better suit for you. With this programme, the government will lend you up to 20% of the value of any new-build home worth up to £600,000. This means that you will only have to provide a 5% deposit and secure a 75% mortgage to buy your new home.
Starter Homes
The government is also planning a new Starter Homes scheme to help first-time buyers under the age of 40.
While the official launch date for the scheme has yet to be announced, it may be worth waiting for if you are considering buying a new-build property and fall into that age group.
It will allow you to purchase a new-build home with a discount of 20% on properties worth up to £450,000 in London, and £250,000 in the rest of the country.
The government plans to make 200,000 new homes available exclusively for first-time buyers; and a host of the largest developers have already pledged their support.
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