August 2016 update: I touch briefly on the Help to Buy ISA ‘scandal’ in this post. If you’d like to know more about that, take a look at my post Help to Buy ISA Scandal: Is It Still Worth Having. Spoiler alert – the answer is yes!
Whether you’re already saving for your first home or you like the idea of buying your own place in the future, you’ve probably heard people talking about the Help to Buy ISA over recent months.
So what is this mysterious new revelation and how can it help you to get onto the property ladder?
What is an ISA?
An ISA is essentially a type of savings account that allows you to save money with the benefit of tax-free interest. In a regular savings account, the interest you receive will be taxed before it enters your account. In an ISA, however, the money is not taxed and therefore in theory you should earn more interest.
However, (we’re going to go off on a tangant now) it’s worth noting that ISA rules are currently in the process of changing, meaning that the majority of savers won’t be taxed on their savings interest anyway. You can learn more about that here.
What is the Help to Buy ISA?
A Help to Buy ISA is similar to a regular ISA except it has one special feature – for each £200 you place in the ISA, the government will top this figure up with an additional £50. This means your savings will be boosted by 25%! That’s huge! On top of that you’ll also earn tax-free savings interest just like you would in a regular ISA.
Help to Buy ISA in summary:
- Open a Help to Buy ISA and deposit up to £1,200 in your first month
- Deposit up to £200 in your ISA each month after that
- When you’re ready to buy your first home, the government will give you £50 for every £200 you saved in the ISA
How much money can I save in the Help to Buy ISA?
There is a limit to how much money you can deposit in the ISA. The most you can save yourself is £12,000 and as a result, the government’s top-up limit is set at £3,000.
In order to redeem a contribution from the government, you need to have saved at least £1,600 in the account.
Will the government top up go towards my deposit?
I’ve added this section on the 19th of August 2016: It’s just been revealed that the government top up cannot be used for the deposit on your home. Read more about this in my Is The Help To Buy ISA Still Worth It? guide. The government’s official Help to Buy ISA website says this:
“When you are close to buying your first home, you will need to instruct your solicitor or conveyancer to apply for your government bonus. Once they receive the government bonus, it will be added to the money you are putting towards your first home. The bonus must be included with the funds consolidated at the completion of the property transaction. The bonus cannot be used for the deposit due at the exchange of contracts, to pay for solicitor’s, estate agent’s fees or any other indirect costs associated with buying a home.”
Who can use the Help to Buy ISA?
- You need to be a first-time buyer.
- You must be aged 16 or over.
- You can use it to buy any home worth under £250,000 (or under £450,000 in London).
- You can use a Help to Buy ISA with any mortgage; you’re not restricted to a Help to Buy mortgage.
- You can’t use a Help to Buy ISA if you’re going to rent out the property.
- You can’t use a Help to Buy ISA on an overseas property.
- You can’t have more than one Help to Buy ISA.
- You can’t technically open a Help to Buy ISA and a normal Cash ISA in the same tax year (but if you already have a Cash ISA and would prefer a Help to Buy ISA, have a word with your bank to see if anything can be done)
How much interest will I earn?
The amount of interest you earn on your ISA savings will all depend on which savings provider you use. Different providers will offer different rates, so it’s worth doing your research and shopping around.
You won’t earn interest on the money you receive from the government because you won’t actually receive this money until you’re ready to purchase your first home.
What do I do if I want to save more than £200 a month towards my home?
Since the Help to Buy ISA deposit limit is set at £200 a month, you’ll have to find another account for the rest of the money you save.
You could leave this excess cash in your current account, but that might not be the best idea if you’re prone to overspending or forgetting where you’re up to. You also may miss out on better interest rates elsewhere.
You may be best placing additional funds into a savings or current account with a generous interest rate. At the time of writing this post, the following accounts offer savers great rates:
- Santander 123 account allows you to earn 3% interest on savings between £3,000 to £20,000
- TSB Classic Plus offers you 5% interest if you have £2,000 or less
- Club Lloyd offers you 4% interest if you’ve got £4,000-£5,000
Make sure you do your research though to find an account that’s right for you. Some accounts have specific terms and criteria that must be met in order to qualify for interest. Other accounts require a monthly fee.
I have a lot of money saved in a Cash ISA already – what should I do?
First thing’s first, if you already have a lump sum in a Cash ISA, it’s worth getting in touch with your bank to see if you’re eligible to open a Help to Buy ISA in the same tax year.
If you are able to open a Help to Buy ISA, you’ll need to find a new home for the money you currently have in your Cash ISA. After all – you’re only able to place £200 in the Help to Buy ISA each month. Compare the interest rates on savings and current accounts to find the best one for your funds.
Is there a deadline to open a Help to Buy ISA?
Help to Buy ISAs are available from 1 December 2015 to 30 November 2019.
You can continue to save in a Help to Buy ISA after this date but only if you opened the account before the deadline. New savers won’t be able to open an account after this date.
If you choose to save money in a Help to Buy ISA, you must claim your government bonus by 1 December 2030.
How does the Help to Buy ISA work for couples?
If you’d like to buy a property with your partner and you’re both first time buyers, you can each open a Help to Buy ISA and essentially double your savings. If you each save £12,000 in your ISAs, you’ll benefit from a £6,000 government boost in total towards your first home.
If you’re a first time buyer but your partner has their own home already or they’ve owned one in the past, you can open a Help to Buy ISA but they can’t. The good news is you can still buy a property together.
Is the Help to Buy ISA worth having?
When I first heard about this government first time buyer scheme. I didn’t think it would be very helpful. However, now that I’ve done more research I’ve realised it’s pretty much a no-brainer. If you don’t already own your own home and you’re able to save some money each month, it’s certainly worth opening a Help to Buy ISA.
Depending on whereabouts in the country you live and the type of property you’d like to buy, the money you save in the Help to Buy ISA might not necessarily cover the cost of your deposit.
However, there’s nothing stopping you opening a high-interest current account alongside the Help to Buy ISA and saving in there too.
