When the government announced its Help to Buy scheme in 2013, it introduced two new initiatives – equity loans and the mortgage guarantee – aimed at helping both first time buyers and home movers looking to purchase a property. The Help to Buy mortgage guarantee is no longer available, however first-time buyers can look to the Help to Buy ISA and the Lifetime ISA for help when it comes to saving for a house deposit.
While the existing Help to Buy schemes have given thousands of borrowers access to 95 per cent mortgage lending for the first time in years, it has still been difficult for many first time buyers to save up the deposit necessary to buy a home.
The Help to Buy ISA was announced by the government in the March 2015 Budget, and is intended to give a boost to those saving for their first home. Similarly, the the Lifetime ISA can be opened by savers aged between 18 and 40, allowing you to save up to £4,000 each year towards your first home, or your retirement.
What is a Lifetime ISA?
In the 2016 budget, George Osborne announced a new Lifetime ISA with the opportunity for the under 40s to save up to £32,000.
The Lifetime ISA is a great option for first time buyers as you can save up to £4,000 a year and receive a 25% state bonus at the end of each tax year until you reach the age of 50.
The Lifetime ISA explained
Designed to help you save for a first home or for your retirement, the Lifetime ISA offers two options for those over 18 years and under 40 years old.
The Lifetime ISA account is tax-free and can be as cash savings or stocks and shares investing. Each individual is entitled to open a Lifetime ISA, which means for couples looking to buy a property together, both of you can open an account and start saving.
How does a Lifetime ISA work?
The Lifetime ISA allows you to save up to £4,000 a year, either as a lump sum or by paying in money at any point during the year - unlike the Help to Buy scheme where you can only save up to £200 a month. The government will then contribute a state bonus of 25%, so if you save the maximum of £4,000, you will receive a total of £5,000 at the end of the tax year.
The 25% state bonus is calculated depending on how much you contribute towards the Lifetime ISA. For example, if you save £2,000, at the end of the tax year you will receive a total of £2,500. You will be paid interest on your savings.
If you are a couple under the age of 40, each of you can open a Lifetime ISA. However, in order to receive the current full state bonus of £32,000 each, you would need to open a Lifetime ISA at the age of 18 and continue to contribute the maximum amount of £4,000 a year until you are 50.
You can use a Lifetime ISA to save a deposit on home purchases of up to £450,000 compared to the Help to Buy ISA which is for properties up to £450,000 in London, and only £250,000 outside of London.
To be eligible for the Lifetime ISA scheme, you must:
For further information on the Lifetime ISA, here is a link to the government’s website:
What is a Help to Buy ISA?
The Individual Savings Account – or ISA – has been around in one form or another since 1999, and is designed to allow individuals to invest up to a certain amount of savings each year and receive interest without paying tax.
The HM Treasury recently released a series of best-practice guidelines for Conveyancers helping with the Help to Buy ISA, you can see the factsheet here.
How does a Help to Buy ISA work?
A Help to Buy ISA is limited to one person. You can save a maximum of £200 a month. When you open your account you can boost your first £200 monthly payment by an initial deposit of £1,000 and you will receive a £250 bonus from the government. The account can hold a maximum of £12,000, so when you come to buy a home you could receive a government top up of up to £3,000.
If you are a couple and both first time buyers, you could open an account each. By both contributing the maximum of £200 a month you can potentially claim up to £6,000 from the government towards a mortgage deposit.
You need to save at least £1,600 in your Help to Buy ISA before you can receive the minimum £400 government bonus.
To be eligible for the Help to Buy ISA scheme, you must:
Be a UK resident and over 16 years of age.
Be a first time buyer purchasing a UK property.
Not purchase a property for the buy-to-let market.
Open an ISA account between 1st December 2015 and 30th November 2019.
Ensure the bonus is claimed through the purchase of a house by 1st December 2030.
The bonus will only be available on home or flat purchases of up to £450,000 in London and up to £250,000 outside London.
Once you are in the process of buying your first home or flat the government bonus can be applied for by your solicitor or conveyancer.
It is important to note that if you are under 40 on 6th April 2017 and already have a Help to Buy ISA you can transfer those savings into the Lifetime ISA or continue saving into both. However, if you wish to purchase a property then you can only use one of the bonuses.
Why should you consider a Help to Buy ISA?
The Help to Buy ISA is a type of cash ISA, which means that in many ways it operates like a normal bank or building society savings account. The selling point for this type of ISA is that, in addition to paying tax-free interest at the provider’s stated rate, it will earn you a 25 per cent bonus, which savers can redeem once they have completed the purchase on their first house.
How much can you save?
The Help to Buy ISA is primarily designed for regular saving, rather than lump sum investments. You are able to invest up to £1,200 in the first month, and up to £200 each month after that. There is no commitment to deposit these sums, so if you can’t afford to save £200 per month, or if there are months when you’re not in a position to put anything in, that’s fine.
Because this is a cash ISA, that means you cannot invest money into another cash ISA within the same tax year, so it’s important to think about how this might affect you if you already have an existing ISA. The good news is that if you are buying a house with a partner, you can each hold a Help to Buy ISA and they will both qualify for the government’s 25 per cent bonus payment, which will be given to you once you have completed the purchase of your new home. You can also withdraw cash from your Help to Buy ISA anytime between exchange and completion to help contribute towards your deposit.
How do I receive my government bonus?
Just before exchanging on your property, you will need to inform your Help to Buy ISA provider that you will be closing your account. It is important that you do not withdraw all of your money as you will need your Help to Buy ISA provider to produce a closing letter for you. If you do not have a closing letter you will not be eligible for the ISA bonus. The reason why you cannot apply for your bonus sooner is that if helps avoid any issues that may arise if your house purchase fell through at an earlier stage.
You will need to present the closing letter to your solicitor or conveyancer who will apply for the ISA bonus on your behalf through an online portal. A solicitor or conveyancer will charge up to £50 plus VAT for this service.
Bear in mind, you will not be able to use the bonus as part of your exchange deposit - the money should be available before completion to go towards your property payment, but will not be available as part of the deposit, as you cannot access it before you exchange. You need to ensure you claim your bonus within 12 months of closing the account and before your completion date.
What are the downsides?
Whilst the idea of getting a boost on your deposit savings is excellent, it's important to remember that you can't actually use the bonus as your deposit. As your conveyancing solicitor has to apply for the bonus to be withdrawn upon completion of the sale, if you need to pay a deposit upon exchange (or are buying from a developer where you may need the total deposit paid earlier in the process) you won't be able to access it in time.
This means that the bonus is only useful for paying towards your mortgage once you're in the house, or can be used to buy furniture etc. The bonus only becomes available when you've already bought your home. Also bear in mind that it can only be used on properties up to £250,000 or £450,000 in London. If you've been saving for years and available properties increase in price, the Help to Buy ISA may not be of use.
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Updated September 2018