James Bailey looks at a new incentive for those saving for the deposit on their first home.
For many first time buyers, the biggest problem is finding the deposit on their chosen property. Their income may enable them to keep up with the mortgage payments once they have bought the property, but given the deposit required on a first home now averages over £20,000 – or nearly £70,000 in London – it is the deposit that keeps them out of the property market.
In March 2015, the government announced the start of a new type of ISA – the ‘Help to Buy ISA’.
Doubling up on the benefits
Individual savings accounts (ISAs) are tax-free savings vehicles, and everyone is allowed to invest up to £15,240 per year in one. The limits for the Help to Buy ISA are lower than this, and those choosing to invest in one cannot also invest in an ordinary ISA in the same tax year.
The Help to Buy ISA is only available to first time buyers of property in the UK, and is limited to one ISA per person. This means that a couple saving for their first home could each have an account and thus double up on the benefits.
What are the limits?
The Help to Buy ISA can be opened with a deposit of up to £1,000, and after that up to £200 per month can be added to the account. In addition to whatever interest is paid on the ISA by the bank or building society that provides the account, the government will pay a tax free bonus of 25% of the amount in the ISA.
This bonus will only be paid at the time the money in the ISA is used to fund the purchase of the ISA holder’s first home – details have yet to be announced, but presumably it will be necessary to prove the money is being used for this purpose, perhaps by it being paid into a client account of the solicitor handling the purchase.
The maximum bonus payable by the government is £3,000, so the maximum that will be saved in this specialised ISA will be £12,000, with the 25% government bonus bringing the sum up to £15,000.
A couple saving for their first home could therefore each deposit £1,000 in their own Help to Buy ISA, and then save £200 each for four years and seven months. They will each have the maximum £12,000 and will qualify for the maximum bonus, giving them a total of £30,000 between them, which (except in London!) might actually be enough for the deposit on their first home.
Wait for it!
The scheme has not yet started, as the government is waiting for the financial services industry to put their Help to Buy ISA packages together, but it is hoped that the first schemes will be available by this autumn. The scheme is scheduled to run for four years from the date it starts, meaning that will be the time limit for starting a new Help to Buy ISA. Once you have started one there is no time limit on how long you can continue to contribute to it.
It will be interesting to see what the level of deposit needed for a first time home will be after the five years from now it will take the first investors to earn their £3,000 bonus. Outside London, the deposit needed has remained at around £20,000 over the last five years, but five years ago in London, it was £50,000 and so it has increased by about 40% in five years!
Practical Tip:
If the only way you are going to be able to fund a deposit on your first home is by saving for it, then a Help to Buy ISA may be the place to save.
