18th November 2015
As the Government prepares to launch the Help to Buy ISA scheme on December 1, David Smith, director of financial planning at Tilney Bestinvest, takes a look at just how helpful it is…
So far, the Help to Buy scheme has helped people attain affordable financing in purchasing new build homes through the Equity Loan, albeit in the short term. It has also stimulated the high Loan to Value mortgage market with the introduction of the Mortgage Guarantee. However for first time buyers even a deposit of 5% (approximately £9,327 based upon the average UK house price in September is hard for young people to come by, hence the introduction of the Help to Buy: ISA. It’s certainly needed as the Council of Mortgage Lenders said that in 2014, only 48% of first time buyers are purchasing their first home unassisted.
On December 1 an individual who has never personally owned a home can open a Help to Buy: ISA, enjoy tax free interest throughout and receive a contribution from the Government of 25% of the value, to go towards the deposit for their first home. A minimum amount of £1,600 needs to be built up within the ISA to qualify for the Government contribution, with the maximum boost being £3,000 for savings of £12,000 and above. Interestingly, it is one ISA per individual, not per home meaning couples can double up their allowance. It will be available to open for four years and the bonus will be payable via a solicitor at the point of house purchase, whenever this may be. If you don’t buy a house, you don’t get the bonus.
Although each first-time buyer can only open one Help to Buy: Isa, they don’t have to stick with the same product throughout the lifetime of the scheme and can transfer out to a different provider. However, it’s only possible to pay into one Cash ISA a year, so holding a Help to Buy: ISA will mean you won’t be able to pay into another Cash ISA as well; you can however pay the maximum into a stocks and shares ISA in the same year. Not surprisingly, you won’t be able to use a Help to Buy ISA if you’re going to rent out the property, or to buy an overseas property.
“The Help to Buy: ISA is no doubt a well-intentioned policy, boosting savings for first time buyers by 25% but it is not without its limitations. There is no investment capability; cash being the only savings option and with interest rates currently as they are, growth will be limited. Needless to say, more could be done: the opportunity to allow investment in stocks and shares and long-term availability would be a start. Above all, the maximum government contribution should be increased; whilst welcomed, £3,000 is barely sufficient to cover the fees of purchase in many instances, never mind making a significant contribution to the equity in the property.
Nevertheless, for those looking to buy their first home, the opportunity of savings protected by the Financial Services Compensation Scheme (FSCS) and a 25% uplift – the equivalent of tax free savings for a basic rate taxpayer –the Help to Buy: ISA is a no brainer. I only hope that such a regime is simply another step in a sequence of initiatives rather than the last throw of the dice to help our struggling first time buyers.
|Maximum Initial Deposit||£1,000|
|Maximum Monthly Deposit||£200|
|Maximum Government Contribution||£3,000|
|Minimum Government Contribution||£400|
|Account Available To Open For;||The Next Four Years|
|Minimum Term To Secure Bonus||None (but minimum value of £1600 required to qualify for bonus)|
|Maximum House purchase price||£450,000 London, £250,000 rest of UK|
|Withdrawals||Permitted at any time, Government contribution however, only made through a solicitor upon purchase of new home