All You Need to Know About Help to Buy ISAs
Jessica Jones, Obp Chartered Accountants | 15th November 2019
Help to buy ISAs are an good option if you are a first-time buyer saving for a desposit on your first home. The Government will add 25% on top of what you save, so that means free cash – who doesn’t like the idea of free cash! To be eligable for any Help To Buy ISAs you need to be 16 years or older, and not have opened another Help To Buy scheme within the last 12 months. It is important not to confuse Help To Buy ISAs with other types of savings ISAs, and you can discuss with your prospecitve banks how to manage your money in these other accounts to give you the best interest rates. To open the account is as simple as depositing at least £1 initially (up to £1200); then, over the course of your active account £200 pcm, then you may be eligible for up to £3,000 as a grant from the government toward your first mortgage.
Some important points on the Help to buy ISAs:
–> You only have up until Saturday 30th November 2019 to apply for one.
–> You must not own currently, or have owned any residential property to open such an account; (you are still eligable if you own commerical property). This type of scheme is to help those not on the housing ladder, as those who currently have investments in residential property already have a leg up on the housing market. If you are unsure of your eligability circumstances with regards to this point, it would be beneficial to discuss this with your chosen bank before applying for a Help To Buy scheme.
–> You can deposit up to £1200 in your very first month, and then up to £200 each month after that for 10 years. These schemes are very flexible, and allow you to deposit whatever sum of money you’d like each month, so you are not locked into consitent direct debits at fixed rates for investment.
–> The Government will add 25% tax-free to whatever amount is in the ISA when you use it to buy a home, up to a maximum of £3000.
–> You have to open one up on an individual basis. If you are saving for a house with someone who hasn’t owned property before, you can both open one individually, so together you can save £400 a month in total!
–> It can be used for any property costing under £250,00, or £450,00 in London, and can be used in conjunction with any mortgage.
–> You can use the money from your Help To Buy scheme combined with any other sum from savings accounts you may already have open.
–> You will be able to rent out your property if you have used a Help to Buy ISA if your circumstances change. However, it won’t be allowed if your sole intention is of renting the property out. The penalty will be you having to pay the money back.
–> The solicitor who is doing the conveyancing will apply online to retrieve your bonus after you have provided them with documentation from your ISA provider that you have closed your account. Be aware that a solitior may charge £60 variably for this admin work!
–> If you take out any amount of money from the ISA before you buy a property, that withdrawn amount alone will not count towards your bonus eligablity. However, it will still be tax-free and you’ll still get the interest rate. To maximise the bonus you receive as part of your scheme, your safest bet is to keep all of that money fixed into the account until the very end.
–> Even if you have already saved for a deposit and you’re buying a house soon, it is worth applying for one. The minimum amount you need active in your account to be eligable for the bonus is £1600, resulting in £400 from the government bonus. Though you might calculate it taking at least 3 months to make up £1600 (ie £1200 initially, and £200 in Month 2 and Month 3), in practice it can take less time. For example, if you put in £1200 on November 30th then £200 in December and a final £200 on 1st January 2020, this actually only takes 32 days!
From 30th November 2019 the Government will replace the Help to Buy ISA with Lifetime ISAs. It does a similar job to the Help to Buy ISA, but providers have been slow to launch LISAs.
LISAs have some advantages over the Help to Buy ISAs, but come with drawbacks too. Customers are able to save up to £4,000 a year into a LISA, and can save lump sums instead of a monthly amount. Someone contributing the maximum from age 18 until age 50 could earn a far higher government bonus of £32,000. This calculation is based on £4,000 a year in customer contributions and £1,000 a year in bonus for 32 years. That compares with a maximum £3,000 bonus for the Help to Buy ISA on customer savings of £12,000.
LISA customers however face a hefty exit penalty equivalent to a quarter of the pot built up if they withdraw the funds for anything but: a first home; retirement (before the age of 60); or as a result of a terminal illness.