The Help to Buy ISA: Everything you need to know

Looking to buy your first home but struggling to save for the deposit? You’re not alone. A recent study by mortgage insurer Genworth reveals a third of would-be buyers in the UK have given up hope of ever being able to raise a deposit to buy a home. Could the government’s latest initiative be the solution they’ve been waiting for?

Over the last few years there’s been no shortage of government schemes to help first-time buyers. From Help to Buy equity loans and mortgage guarantees to Shared Ownership, there are certainly plenty of options for first-timers looking to get on the property ladder. And last month, Chancellor George Osborne used what could be his last Budget to announce the government’s latest initiative to help buyers – the Help to Buy ISA.

How does it work?

Under the new scheme would-be buyers will open tax-free savings accounts called Help to Buy ISAs to save for a mortgage deposit. You can deposit an initial £1,000 and £200 a month thereafter. The government will then give you an extra 25% on top when you come to buy a house. So for every £200 you save, the government will give you £50. The maximum ‘bonus’ the government can give is £3,000. To get this you’d need to save £12,000. The bonus is available on homes up to £450,000 in London and £250,000 outside London.

When will Help to Buy ISAs be available?

Help to Buy ISAs will launch in the autumn and will be available for four years. Once you have one you can keep it for as long as you like.
However, with the General Election just weeks away, whether or not the scheme sees the light of day will depend on what happens on May 7.

Who can open a Help to Buy ISA?

The accounts will only be available to first-time buyers.

Who will offer Help to Buy ISAs?

The ISAs will be offered through banks and building societies and, come Autumn, they will start to reveal the rates they’ll offer.

Do I have to buy a new-build?

No. Help to Buy ISAs can be used to buy any property.

Can I open a cash ISA as well as a Help to Buy ISA?

If you open a cash ISA or put money into an existing one you won’t be able to take out a Help to Buy ISA in the same tax year, meaning you’ll have to wait until next spring.

What are the downsides?

One criticism of the scheme is that, with house prices rising, it’s like that the amount needed for a deposit will be much higher than £15,000 (the maximum you can make with the Help to Buy ISA, including the government bonus). However, there’s nothing to stop you from saving more in another account and, if you’re buying with your partner and he or she is also a first-time buyer you can both take out Help to Buy ISAs and benefit from a £6,000 bonus from the government.

It’s worth noting too that the Help to Buy ISA can be used in conjunction with the other Help to Buy schemes meaning would-be buyers can use the ISA to save for a 5% deposit.

Box: Help to Buy Equity Loan & Mortgage Guarantee

The Help to Buy ISA is the latest government initiative aimed at helping first-time buyers to get a foot on that elusive first rung of the property ladder. But how does it compare to the original Help to Buy Equity Loan scheme?

Help to Buy was launched in 2013 and consisted of two separate parts. The first part allows borrowers to receive an equity loan from the government to help towards their deposit. Available for new-build properties only, buyers can borrow up to 20% of the value of the property meaning they’ll only have to put forward 5% in order to access cheaper mortgage deals.

The loan is interest free for five years after which it will have a rate of 1.75% a year, rising annually in line with Retail Price Index inflation plus 1%.

The second part of Help to Buy became available in October 2013, three months earlier than its planned launch date January 2014 and involves a mortgage guarantee. The scheme is available on both new and existing properties and allows borrowers to raise as little as 5% deposit with the government providing the mortgage lenders with a guarantee for up to 15% of the mortgage – minimising the risk for the lender.

Both schemes are available for homes up to £600,000.

Both the mortgage guarantee and the equity loan schemes are available to both first-time buyers and existing owners.

About Author: Christine Toner