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ISA

Your guide to the Help to Buy ISA

The housing crisis in the UK is widely mentioned in the media, but the extent of it is often underestimated. House prices took a knock during the financial crisis, but have since recovered dramatically. This, coupled with stagnant wages over the past decade, and some stringent new mortgage affordability rules introduced in 2014, has intensified the difficulties for prospective first-time buyers.

In London, the gap between earnings and house prices has become particularly acute, with official ONS figures (as at 2017) showing that house prices in the capital are, on average, 13 times higher than the average first-time buyer’s salary. This represents a 235 per cent increase since 1999, when it stood at 3.9 times the annual wage of a full-time worker aged 22-29.

Even in the North East, where the corresponding figure stands at a more-palatable 5.5 times, there has still been 124 per cent growth in the house price/wage gap for individuals within this age group since 1999 (it was 2.46 times back then).

Interestingly, figures show that the prices of new build homes in particular have escalated since the crash. As the below graph demonstrates, the affordability ratio for new properties and existing homes was identical at 6.35 in England and Wales in 2009. However, while the latter has since increased moderately to 7.57 (as at 2017), the ratio for new homes has soared to 9.68:

Graph illustrating the affordability ration for new properties and existing homes

Source: ONS

It was with this in mind, coupled with considerable public pressure, that then-Chancellor George Osborne announced a prospective solution for first-time buyers at Budget 2015: the Help to Buy ISA.

What is a Help to Buy ISA?

The Help to Buy (H2B) ISA officially launched on 1 December 2015, with the primary aim to help those who have never owned a property save for a mortgage deposit, and ultimately gain a foothold on the housing ladder. Aside from the tax-free interest you typically associate with an ISA, the key USP behind the H2B ISA is that savings are topped up by tax-free Government contributions to the tune of 25 per cent, which is receivable at the point the offer on your first home is accepted.

Furthermore, interest rates on H2B ISAs tend to be a lot higher than easy access savings accounts. Money held within this type of ISA carries no investment risk either, and is protected by the Financial Services Compensation Scheme in the same way as any UK savings account. 

It also has the same accessibility as an easy access cash ISA or savings account, and there are no penalties for withdrawals. The only consideration is that you will not receive a bonus on the amount you withdraw.

How much can I put in a Help to Buy ISA?

The most you can contribute to a Help to Buy ISA is £12,000, meaning the maximum State-sponsored bonus you can accrue is £3,000. There is also a monthly cap on contributions of £200, so the effective monthly maximum bonus you can earn is £50.

However, in the first month that you open the account, you are allowed to make an initial deposit of up to £1,000, plus an additional £200, as per your monthly contribution limit. As such, if you’re able to continue to add £200 each month, you can reach your total limit of £12,000 within 55 months.

If you’re looking to buy in the nearer term, it’s worth noting that the minimum you must save into your H2B ISA before you will be eligible for your Government bonus is £1,600.

How does a Help to Buy ISA work?

In addition to the contribution parameters explained above, there are some important rules to be aware of when it comes to the bonus. Firstly, you will only be eligible for the bonus if the property you are purchasing costs less than £250,000, with the exception of London (inner and outer boroughs), where the limit rises to £450,000.

And, as mentioned above, the bonus can only be claimed once you are ready to buy the property, and your offer has been accepted. The application for your bonus will need to be done through a solicitor (for a maximum fee of £50 plus VAT), and this will take place after you have handed over the exchange deposit, and before the purchase of the property is complete. 

Unfortunately, the bonus can only be used to top up your mortgage deposit, and cannot be put towards your exchange deposit. This rule is largely in place to prevent individuals from receiving their bonus, and then withdrawing from the sale agreement. Yet while it may come as a disappointment to some that the bonus won’t assist with building up to meet the threshold for the exchange deposit, it can go a long way to reducing the amount borrowed, which in turn should result in a lower mortgage rate.

The H2B ISA falls within the broader category of cash ISAs, which means you aren’t able to subscribe to both types of ISA within the same tax year. However, some banks and building societies offer so-called ‘split ISAs’, which effectively allow you to spread your ISA allowance across both types of ISA within the same overall wrapper.

For those considering renting out their property once they buy, you will not be able to do so if you have used an H2B ISA to fund the purchase. In fact, you need to sign a declaration confirming that you will be living in the property, and not renting it out. If you fail to comply, and the State finds out, you will be liable to repay the bonus you received. That said, there is some flexibility if circumstances change (eg: emigration), which is dealt with on a case-by-case basis.

Finally, one other nuance to remember is that the H2B ISA is compatible with any type of mortgage, and you are under no obligation to take out a mortgage with the same bank or building society with which you hold your H2B ISA.

How do I open a Help to Buy ISA?

Opening a Help to Buy ISA is as simple as opening a cash ISA, and usually takes no more than a couple of minutes. You can do so in branch, although many banks and building societies enable you to do it online too.

The below outlines the eligibility criteria for opening a H2B ISA, coupled with some other key rules and restrictions:

A checklist table of the eligibility criteria for opening a H2B ISA, coupled with some other key rules and restrictions:

How do I close a Help to Buy ISA?

Again, most providers will enable you to close your H2B ISA online or in branch. If you have not met the minimum threshold, or are closing the account in the absence of plans to purchase a property, you will not be in line for a Government bonus, and can therefore close the account in much the same way you would any other cash ISA.

If, however, you are eligible for the bonus, the process for claiming it and closing your H2B ISA is somewhat different. Instead, you will need to get a closure statement from your bank or building society, which your solicitor (and/or conveyancer) uses on your behalf to apply for the bonus. Upon closure of your account, the ISA provider will transfer the monies into another account (or directly to your solicitor if you prefer), and you will then be all set to complete the purchase of your property.

What can the Help to Buy ISA be used for?

Primarily, the H2B ISA is aimed at those who are having difficulties getting onto the property ladder, and, courtesy of the boon of a 25 per cent Government bonus to top up your savings in the account, it should bring that bottom rung closer for many people.

The H2B ISA is also a very useful interest-bearing account, so it could be a good fit regardless of whether you plan to buy a first home or not. Among mainstream banks, you can fetch a rate of up to 2.58 per cent, which beats the current rate of inflation. Local building societies are even more competitive. For example, Penrith BS offers a rate of 3 per cent if you live in the Cumbria region. 

So, for those looking to build up their savings while deciding what to do with them, using a Help to Buy ISA to make your money work harder could be a good idea.

Can you combine two Help to Buy ISAs?

You can only open one H2B ISA yourself. However, more than one H2B ISA can be used to fund the purchase of a first home. So if you and a partner or spouse have never owned before, you can both individually open an H2B ISA, save £200 into each of your respective accounts every month (£400 in total), and effectively accrue a total collective bonus of up to £6,000. The same procedure articulated above applies too, so this £6,000 can be earmarked towards the same mortgage deposit.

If your partner has owned before, or owns a property at present, you can still open an H2B ISA as someone who hasn’t owned before, and be eligible for the bonus – even if you’re buying the new place together.

Can you transfer a Help to Buy ISA?

There is nothing stopping you transferring your H2B ISA from one participating bank or building society (or credit union) to another. Just be mindful that you can only have one H2B ISA at any given time, and that the monthly contribution maximum of £200 will still apply.

You can also transfer your cash ISA to a Help to Buy ISA when you open the account. The maximum you can transfer initially will be £1,200, as per the rules explained earlier in this guide.

When does the Help to Buy ISA end?

The cut-off date for opening an H2B ISA is 30 November, 2019 – four years after it was launched. However, if you have opened an account prior to this deadline, you will be able to continue making contributions until 30 November, 2029 (and the bonus will need to be claimed by 1 December, 2030).

Are Help to Buy ISAs worth it?

Over 500,000 people have opened an H2B ISA to date, which suggests it has been a popular choice among savers. In addition to the bonus, it has a number of key advantages, including competitive tax-free interest, easy accessibility to your money, the flexibility to use it in conjunction with a partner/spouse’s H2B ISA, transferability with other H2B ISA providers, and the opportunity to use it in combination with other schemes, such as Help to Buy.

That said, the contribution limit of £200 per month may be too restrictive for some, as will the price caps on properties eligible for the bonus. There is also no interest earned on the Government bonus. 

The H2B ISA was the pre-cursor to the Lifetime ISA (LISA), which launched in April 2017. The main similarity between the two is that both offer a 25 per cent State-sponsored bonus. LISAs are also geared towards first-time buyers, in that you are not allowed to access money in this type of account until you turn 60 – unless it is to purchase a first home, upon which you will be eligible to receive the bonus too. You can contribute a more-generous £4,000 per year into a Lifetime ISA, and the bonus can be used to fund the exchange deposit. Additionally, the LISA is available as both a cash ISA and/or a stocks & shares ISA.

Deciding which option suits you better may be tricky, but there are some basic rules of thumb. If you need flexibility/access to your cash, and aren’t sure whether you’re going to buy at all, then an H2B ISA may be the right pick. If you’re absolutely sure you want to buy a place, are in no rush to do so, and have the capacity to maximise your bonus, then a LISA could be the way to go. 

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