On 1st December 2015, the government introduced something which is going to help all prospective first time home buyers – the Help To Buy ISA. The headline is that the government will add 25% on top of your balance when you buy your first house, up to a maximum of £3,000 per person. So if a couple is buying their first house together, they could potentially receive up to £6,000 from this scheme. Sounds good doesn’t it? The Government are helping us buy our first house – so what’s the catch?
The Idea
The Help to Buy ISA is what George Osborne has come up with in an attempt to help young people on to the property ladder, and help kick start the UK economy again. By getting us on to the market, it means those who are ready to move on to the second rung of the ladder should have a buyer, and so the house buying chain begins. This also happens to help the property market start to pick up, and the UK economy starts moving in the right direction again. As it happens, if there aren’t enough homes for first time buyers, and all young people have one of these ISAs, they are going to want to buy in the next few years, so someone is going to have to build the houses – simple supply and demand economics. All of a sudden, construction picks up, people are needed to build houses so jobs are created, and BANG – the UK is back in business!
So how can a bank account be responsible for all this?
Well, they have a number of benefits, mainly based on the fact that when you buy a house and go to pay your mortgage deposit, your Help to Buy ISA balance will be increased by 25%. This means, if you have £12,000 in the account, the government adds £3,000 and all of a sudden you have your 10% deposit for the £150,000 house.
And don’t think the money in this account isn’t going to grow in the meantime, because high street banks are offering up to 4% interest on these accounts. So, not only are they offering the highest guaranteed interest rate as any other type of bank account, but they are going to add extra money on top of this? So, I hear what you’re thinking; “If my parents have promised me a helping hand with my deposit, why don’t I just ask them for that £5,000 now and I’ll throw it into one of these Help-to-Buy ISAs, it’ll grow by 4% for the next 3 years to £5,624 plus 25% added on is £1,406 and I have £7,030. Sounds great, right?” Not quite, here’s the catch. Or should I say, catches.
The Catch
You can only fund your Help to Buy ISA with a maximum of £1,200 initially in the first month. Then, you can only top this up with a maximum of £200 per month from then on. So for you to actually get to the magic limit of £12,000, it’s going to take a while. About 4 years.
Also, the money must come from your own bank account, so while it isn’t completely clear how they are going to patrol this, if your parents are going to give you £1,200 to help fund this, you may need to hold it in your bank account for a few weeks first.
You can only open a Help to Buy ISA if your name hasn’t been on any other property, so if you have inherited a property from parents or grandparents, you are ineligible.
There are quite a few criteria and exclusions, but the government’s website is actually very straightforward, so you should find the fine print you are looking for here.
Cynics might argue that if you are saving in a Help to Buy ISA you lose out on the ability to use a “normal” invested ISA. You are limited to £3,400 in year one and £2,400 every other year, which is much less than the current ISA annual allowance of £15,240, so you lose out on tax free earnings and gains of potentially hundreds of pounds. While you can’t have both ISAs, you can open a General Investment Account (GIA) and a Help to Buy ISA, and realistically, the tax you paid on gains and income on £15,240 in a GIA will be the last thing you’re thinking about when you receive that added 25% bonus.
An Early Christmas Present
All in all, this is a “must consider” for every prospective first time buyer, whether you are looking to buy in the next year or the next 5 years. It’s almost the only time you get “free” money, so you would be a fool if you turned your nose up at 25%. So follow the rules, don’t bankrupt yourself and collect £200 (well, up to £3,000 actually) when you pass Go. Maybe not as fun as Monopoly, but definitely a more useful present.
If you are eligible, get one of these opened, and if nothing else, you’re on your way to the deposit. Once you’ve started that, you can start thinking about everything else like how you are going to afford the ongoing costs, what mortgage is right for you, how to protect the mortgage, what colour you want the walls and what size of TV is ideal for your living room?