First time buyers cannot use the Government bonus from the scheme towards a deposit. Here’s why it’s still worth taking part.
The Government Help to Buy ISA scheme gives savers a 25% bonus of up to £3,000 each on savings towards their first home.
However, a clause in the small print means that the bonus can only be claimed after contracts have been exchanged – in other words, after the deposit has been paid. The bonus is paid directly to the buyers’ solicitor and must be put towards the balance due on completion.
These rules weren’t understood when the scheme was launched and as a result, some buyers have had to negotiate a smaller deposit up front and the remainder later, when their purchase completes. Where this hasn’t been possible, buyers have had to borrow the money to be able to afford the shortfall. The Government’s lack of clarity over the rules has attracted criticism, with some experts saying the scheme is “technically useless”.
How the Help to Buy ISA works
- The scheme is open to first time buyers aged 16+.
- To take part, you must open a special ‘Help to Buy ISA’.
- The ISAs are easy access and the rates on offer are usually very good.
- You can withdraw the money at any time but will lose the bonus.
- You can make an initial deposit of £1,000 then save a maximum of £200 per month.
- You can transfer your Help to Buy ISA between different providers to benefit from better interest rates.
- Provided that the ISA is for a house deposit, the Government will pay a 25% bonus on the total saved, up to £3,000. However, it is now clear this is not payable until after contracts have been exchanged.
- The property purchased must cost up to £250k (or up to £450k in London), and must be purchased with a mortgage.
- The final balance in the ISA must be £1,600 minimum. It can be as big as you like, but you won’t get more than the maximum £3,000 bonus.
- If buying as a couple, both can individually benefit from the scheme, provided both are first time buyers. In other words, a couple can receive a total bonus of £6,000 between them.
- If one is a first time buyer and the other isn’t, just the first time buyer can take part in the scheme.
- The Government bonus must be requested at least five working days before completion by your solicitor/lawyer. It cannot be requested after your house purchase has completed.
Although the terms of the deal have caused some problems, solicitors and brokers have urged buyers not to give up. The consensus is that sellers won’t want to lose the sale over a short delay of a small sum – and many are happy to accept a 5% deposit instead. Although your mortgage deal may require a 10% deposit, it is usually fine to pay the balance of this on completion.
A spokesman from the Treasury has explained that the reason the bonus is not available until after exchange of contracts is so that the bonus is not paid before the house purchase is certain to proceed. This allows the Government to provide support to those definitely buying a property – very few sales will fall through after exchange of contracts where a deposit is at stake.
Despite these difficulties, more than half a million have opened Help to Buy ISA accounts, and already 22,000 have used them to buy their first home.
The Lifetime ISA
A new Lifetime ISA (LISA) will be launched in April 2017. With this ISA the Government will also give you a 25% bonus, but you can use it to buy your first home or to save for retirement.
You’ll be able to save £4,000 a year with the Lifetime ISA, more than the £2,400 a year that you can save with the Help to Buy ISA (£3,400 in the first year).
The Lifetime ISA pays the 25% bonus at the end of every tax year, with a maximum £1,000 bonus per year.
When they launch, you could have both a Help to Buy ISA and a Lifetime ISA, but you’ll only be able to use the bonus from one type of ISA to buy your first home. You could instead transfer your Help to Buy ISA to a Lifetime ISA.
There are a few more differences with the Lifetime ISA:
- You’ll be able to invest lump sums – although the maximum bonus is still £1,000 a year.
- You can receive a maximum bonus of £32,000 based on maximum contributions over 32 years.
- You can invest in shares as well as cash using your LISA.
- You can purchase a property up to £450,000 anywhere in the country.
- The bonus will be available after the LISA has been open for 12 months.
- You have to be 18 – 39 to open an account.
Experts recommend that you don’t wait for the new LISAs – instead, open a Help to Buy ISA now and transfer it to a LISA when these become available.
Current best Help to Buy ISA interest rates:
- Virgin Money – 2.5%
- Barclays – 2.27%
- Nationwide – 2%
- Aldermore – 1.75%
If you would like advice on any aspect of the Help to Buy ISA scheme, get in touch with our Property Team.