Warning: you only have until 30 November 2019 to start investing in a Help to Buy ISA. If you’re a first time buyer looking for financial support to get on the property ladder, it’s time to take action now. Ensure you are fully aware of the Help to Buy ISA rules below.
What is the Help to Buy ISA?
So far, more than 1.2 million Help to Buy ISA accounts have been opened since the government scheme was launched in 2015. This has generated bonuses of £157 million, paid out between 2015 and 2018, supporting the purchase of £25.3 billion worth of property. Designed to give first time buyers a helping hand, the Help to Buy ISA enables individuals to earn 2.58% interest tax-free. The government will top up savings by an extra 25% (subject to limits in the Help to Buy ISA rules). Now is the crucial time to act if you want to open a Help to Buy ISA, as they may not be available by the end of the year.
The most common Help to Buy ISA questions answered
1. Who can get a Help to Buy ISA?
Anyone over the age of 16 who is a first time buyer. A first time buyer is defined as someone who has never owned an interest in a property, either in the UK or elsewhere.
2. What are the benefits of a Help to Buy ISA?
Primarily, when you use the ISA to buy a property, the government will add 25% extra to whatever you have saved – up to a limit of £12,000. So, if you have saved £5,000 you’ll get a bonus of £1,250 and if you’ve saved £11,000 the extra will amount to £2,750. The only major caveat is that you need to have saved at least £1,600 to get any bonus at all.
3. How do you save with a Help to Buy ISA?
The best approach is to make use of the maximum limits. So, for example, you can save £1,200 in the first month and after that up to £200 a month. It’s worth noting that if you don’t make the full payment in one month there is no scope for using the remainder the next. So, if you only pay £100 in to the ISA in February, you can still only add another £200 in March, not £200 plus the £100 not paid in during the previous month.
4. Why are Help to Buy ISAs so good for joint buyers?
According to the Help to Buy ISA rules, two people who are buying together can each bring a Help to Buy ISA into the purchase. As long as both people are first time buyers both can open an ISA, receive the bonus and put it towards a joint purchase. You don’t have to be in a couple to do this – just buying a property with someone else.
5. Can a Help to Buy ISA be used to purchase any type of property?
Yes, the property type doesn’t matter. You don’t have to buy a new build property with a Help to Buy ISA, unlike some of the other government schemes.
6. Are there any limits on property value?
If you’re buying in London then Help to Buy ISA rules state that the property should be worth £450,000 or less. For those purchasing outside of London the limit is £250,000. This must be the total property price – you won’t get the bonus on a proportion of the price of a more expensive property that sits below these thresholds.
7. Do you have to have a mortgage from the same bank?
No, it’s fine to open a Help to Buy ISA with one bank and apply for your mortgage with another one.
8. How do you get the bonus?
It’s paid at the point at which you’re ready to buy a property. This is the process:
- Contact your ISA provider and tell them you’re closing the account
- Transfer the money from your ISA into another account – yours or your solicitor’s
- The Help to Buy ISA provider will send you a closing letter
- Once you have exchanged, your solicitor will use the closing letter to apply for the bonus for your property purchase
- The funds are paid out before completion takes place
There is a charge for the work involved in applying for the Help to Buy ISA bonus – there’s a cap of £60 on this fee, which is £50 plus VAT.
9. So the Help to Buy ISA bonus isn’t available for the initial deposit?
No. The government decided that it should be paid out at the point of completion. That means that you will need to come up with the home exchange deposit yourself. During the property process there are two deposit stages:
- The home exchange deposit is paid after an offer is successfully accepted on a property. This is what most people understand to be “the deposit.” It’s usually around 10% of the property price but could be as low as 5% or as high as 20% depending on your circumstances. According to Help to Buy ISA rules, anything that you’ve saved in a Help to Buy ISA can be put towards the home exchange deposit – except the government bonus.
- The mortgage deposit is what is paid over on completion in exchange for the transfer of legal ownership of the property. You can use the Help to Buy ISA bonus as part of the mortgage deposit.
If you’re dependent on the bonus to meet the seller’s requirements then it’s best to be up front about it. Some sellers will accept a slightly lower deposit on exchange on the understanding that the difference will be made up at the point of completion.
10. Is the money tied into the ISA once it’s paid in?
No, if you decide that you want to use what you’ve saved for something else then you’re free to withdraw the cash at any time. If you don’t use it to buy a property then the government won’t pay the additional 25% – this is only available for a property purchase.
11. Is it worth it if you’re buying soon?
Given the delays that can be involved in property purchases, yes. You only need to have saved £1,600 to get the government bonus – that could be £1,200 in the first month and then £200 in each of the two subsequent months. So, in theory, after three months you would be able to benefit from the scheme, receiving the minimum £400 bonus.
12. Does a Help to Buy ISA affect other savings products?
You can’t pay into a cash ISA and a Help to Buy ISA in the same tax year. However, there are always ways around this. If you do find that you want to invest in two products like this in the same tax year then you’ll need to look for a split ISA product. This effectively combines a Help to Buy ISA and a cash ISA in a hybrid product that (legally) sidesteps some restrictions. However, the £20,000 ISA tax allowance will still apply, which means that you can’t deposit more than this across all your ISAs in any one year.
13. Who is the Help to Buy ISA designed to support – and who is really getting the benefit?
First time buyers. Initial statistics from the first 3-4 years indicate that the average age of those buying using the scheme is 27. This is lower than the national average first time buyer age, which is 30. Other statistics from the scheme reveal that it has provided much need support to those who are outside of London. In fact, the largest number of property completions were located in the North West, Yorkshire and The Humber, and the West Midlands.
14. How is the Help to Buy ISA different from the Help to Buy Equity Loan?
Both are designed to support property purchases. However, the Help to Buy Equity loan is not a savings bonus. Instead, the government will lend 25% of the property price to a buyer with at least a 5% deposit. The equity loan is also paid out on completion, not exchange, so for either of these products you will need to have the right amount of deposit saved.
15. Is a Help to Buy ISA a better choice than a Lifetime ISA (LISA)?
Both schemes provide a 25% top up from the government but the LISA has a higher maximum – you can save up to £4,000 a year with a LISA. The bonus is paid monthly with a LISA, as opposed to on completion as is the case for the Help to Buy ISA. However, the LISA requires at least a year’s worth of saving before a property purchase can be made and there is an early withdrawal penalty. Important to note is the fact that you can have both a Help to Buy ISA and a LISA but you can only put the bonus from one towards the property purchase.
16. Can you rent out the property if you use a Help to Buy ISA?
In theory, no. You certainly can’t use a Help to Buy ISA if you’re planning to rent the property from the point of purchase. However, the government has indicated that a change of circumstances further down the line might mean it’s acceptable to later rent out a property purchased in this way.