On the 30th November the governments Help To Buy ISA closes to new savers. We’ve listed everything you need to know about the Help To Buy ISA below and we’ve also added some information about Life Time ISAs.
What is the Help to Buy ISA?
The Help to Buy ISA is a government scheme aimed to help people save for a mortgage deposit to buy a home. With the attractive proposition of a 25% bonus from the government on any contributions to use towards a first home, they are understandably very popular.
Anyone aged over 16 is able to open a Help to Buy ISA. Most importantly, you must be a first-time buyer. Therefore, you can’t have owned or part-owned a property in the past.
NB. You can use the Help to Buy ISA to buy any property worth up to £250,000 (or up to £450,000 in London). You can also use the Help to Buy ISA for new and old build properties.
How does it work
People saving into a Help to Buy ISA can put up to £1,200 in during the first month, then a maximum of £200 a month after that. You can save less if you wish, but it has to amount to a minimum of £1,600 to qualify for a bonus (in this case, it would be £400).
What is the maximum contribution?
The maximum contribution you can make to the Help to Buy ISA is £200 a month. This is a total of £2,400 a year, however, in the first year you can save up to £3,400. (£1200 in the first month + £200 x 11 months)
NB. The payment limit is calculated per calendar month, so if you pay in £200 on the 28th of the month, you’ll only have to wait until the 1st of the next month to be able to pay in again.
Can the bonus be used for your deposit?
In the past there has been some confusion around when you can actually access the bonus money. Importantly, you only get it on completion of a home purchase. You don’t get it at the “exchange” stage, where buyers typically put down a 5% or 10% deposit to guarantee the purchase.
Receiving the bonus
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.
Simply put, the Help to Buy ISA bonus is taken away from the mortgage amount you lend from the bank – Your lender will include the amount of your government bonus when working out your mortgage loan amount.
e.g. if you are buying a property worth £300,000 and you are putting down a 5% deposit (£15,000) then the government bonus can be used on the remaining £285,000. So, if you have £1600 in your ISA account + the £400 bonus. You will be able to take away £2000 from the overall mortgage you need.
Do you have to use the ISA/bonus to buy a property?
If for whatever reason you decide not to buy a property you can cash in the ISA at any point. You will not get the government bonus but will still receive the interest of up to 2.27% a year, depending on the bank/banking society. You are permitted to make withdrawals if necessary, however, the bonus will only be applied to the amount you have in the account when you do buy a property.
Can you open a Help to Buy ISA if you already have a cash ISA?
Yes. If you have already paid into a cash ISA this tax year you will need to transfer your cash ISA to a help to buy ISA.
You can transfer up to £1,200 of your active cash ISA balance into your Help to Buy ISA.
The Lifetime ISA, launched in April 2017, provides the same attractive government bonus (25%), but also offers other significant benefits and drawbacks compared with the Help to Buy ISA.
If you decide to opt for a Lifetime ISA, you can save up to £4,000 a year with a government bonus of 25% of everything you save, up to £1,000 a year. The money can be used to buy a first property or be put towards retirement from the age of 60. Savers, therefore, have the potential to earn a total of £32,000 in bonuses if they pay in the maximum £128,000 over 32 years from age 18. Accounts can be held in cash, or stocks and shares.
NB. You can use your Life Time ISA bonus towards your deposit.
However, there is a penalty if you decide to make an early withdrawal from your ISA account. If you take out any money before you reach 60 and do not use it to buy a first home, you pay a 25% penalty. For instance, imagine if you saved £4,000 in a Lifetime ISA over a year, receiving the £1,000 boost for a total of £5,000. If you cash this in you would have to pay 25% of this total (£1,250). The penalty applies unless you are terminally ill or if you die.
The maximum bonus you can received based on maximum contributions over 5 years
*You need to have held a LISA account for at least one year in order to qualify for the bonus. However, you only need to have paid £1600 into the Help to Buy ISA to qualify for the bonus. Meaning you can get a bonus after just 3 months.
** The Help to Buy bonus is capped at £3,000 (£12,000 overall contribution) therefore, the maximum contribution you will be able to make in year 5 (that is eligible for the bonus) is £1400 instead of £2400.
As you can see, the Life Time ISA pays a bigger bonus over the long term. However, if you are buying a property within the next 12 months the Help to Buy ISA will give you the better return as you can take your bonus once you’ve paid in £1600. Under the Life Time ISA you will have to wait at least one year to get your bonus.
*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.