Help to Buy ISA

In the Chancellor’s spring budget announced on 18 March 2015 the Chancellor introduced the new Help to Buy ISA as an expansion of their existing Help to Buy initiative, aimed at increasing the opportunities for first-time buyers,  at the same time boosting the house building industry and which, according to the Government has so far supported 83,000 people in purchasing their first new home.

The Help to Buy ISA is aimed at addressing the problem faced by many potential first-time buyers of being able to save enough money for a deposit to put down on their first home, this being further exasperated by the low returns experience since the onset of the financial crisis.

The Help to Buy ISA will be available through banks and building societies from the autumn of 2015.  Anyone aged 16 and over and who have never owned a home will able to open a Help to Buy ISA.  To get the maximum £12,000 bonus from the government, the account holder will have to save £200 a month for 5 years. The Help to Buy ISA scheme is anticipated to run for a period of 4 years, though there will be no limit on the time the account can be open, no limit on the time in which the government bonus can be claimed (this assumes that the scheme is not scrapped later on).  The Government has forecast that spending on the scheme will be £45 million in the current tax year increasing to £835 million in 2019-20.  Whilst the account is opened, the account holder can withdraw money but will only get the bonus when they come to actually buy a home.

Savers choosing to save through a Help to Buy ISA will receive a government bonus of 25% of the amount saved, this will represent £25 for every £100 saved. The maximum monthly contribution permitted under the scheme will be £200, the maximum government contribution £3000 on a maximum of £12,000 of savings. The Government bonus will be calculated and paid when the account holder purchases their first new home.  The Help to Buy ISA will be limited to one per person (not one per home) so it is possible that two people buying together can both receive a separate bonus. The government’s intention is to provide tax-free government bonuses to help people who are saving up to buy a first home worth up to £450,000 in London, £250,000 in the rest of the UK.  

Help to Buy ISA will be available through most high street banks and building societies,  the process of opening the Help to Buy ISA will be identical to the process of opening existing cash ISAs.  The bank or building society will apply their normal account opening processes.

The main features of the Help to Buy ISA are as follows:

·         The Help to Buy ISA will only be available to first-time buyers;

·         Each first-time buyer can only open one Help to Buy ISA during the lifetime of the scheme.

·         The maximum an account holder can save  will be £200 per month (though there will be an opportunity to deposit an additional £1000 when the account is first opened)

·         The maximum government bonus will be £3000 on £12,000 worth of savings .

·         The government bonus can only be put towards a first home located in the UK with a purchase value of £450,000 or less in London,  £250,000 or less in all other parts of the UK.

·         The government bonus can only be used for the property that is being used for a first time buyer to live in as their only residence.

·         The government bonus can be claimed any time, subject to minimum bonus amount of £400

·         The government bonus will be calculated by the scheme administrator on the account balance at the point of claim (when purchasing the property)

·         The duration of the Help to Buy ISA scheme will be 4 years from the date the scheme formally opens however once an account is open there is no limit on how long a person can save into a Help to Buy ISA and no time limit on when they can use their government bonus.

Each bank or building society will offer their own interest rate and will be permitted to apply their existing ISA rules to the account.  Savers will not be permitted to open a Help to Buy ISA and a cash ISA. The government bonus will be tax-free. The government intends that the Help to Buy ISA scheme will be available from the autumn of 2015.

There has been some positive feedback from the mortgage lenders as it is anticipated that people using the Help to Buy ISA scheme will be able to increase the amount they can put down as a deposit by £3000 in the case of a single person, and £6000 in the case of a couple.  Being able to put down a larger deposit may mean that they will qualify for a lower interest rate on their mortgage.

Previous government schemes to boost the housing market have been criticised for pushing house prices up and by doing so, defeating the initial purpose of the scheme. The government’s £12,000 cap on the government bonus is designed to prevent a surge in house prices,  enabling buyers to save a deposit in the lower value, lower growth markets in areas outside London such as the Midlands and the North.  Another benefit of the scheme is that it encourages people to save towards a property rather than committing themselves to high loan to value mortgages with high interest rates.

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