Recent news has emerged that first-time property buyers will not be able to put the tax-free cash bonus generated by the Government’s Help to Buy’ ISA scheme towards the initial deposit for a new home. They will have to source the whole deposit themselves before the contract can be exchanged. Neither can they use it to off-set costs like a solicitor’s fees or estate agent’s commission. Any bonus earned from a ‘Help the Buy’ ISA will be paid out as a lump sum once the sale has been fully completed.
The Government’s ‘Help to Buy’ ISA was launched in the March 2015 Budget by then-Chancellor, George Osborne, with the intention of helping new buyers get onto the property ladder. By June 2016, more than 500,000 ISAs were reported to have been opened. For every £200 saved in a ‘Help to Buy’ ISA, the Government pledged to add £50, up to a maximum of £3,000, to put towards a first home. Eligible property value limits are set at £450,000 in London and £250,000 elsewhere in the UK.
Estate agents have spoken out against the arrangement, arguing that many potential home owners took out the ISA under the belief that they could use the Government’s contribution to pay their initial deposit, a major obstacle for many to home ownership. However, the lump sum will still enable first-time buyers to reduce subsequent mortgage payments, once the property sale has been completed.
There are, of course, pros and cons involved in taking out a ‘Help to Buy’; ISA. Just like a standard ISA, it is tax-free, allowing first-time buyers the chance to save without having to pay on the interest earned. The Government’s contribution equates to a 25% added bonus – better rates than many of the top savings rates currently available.
You can start saving from the age of 16 and each person can have their own account, allowing a couple to double up their tax-free savings. You can withdraw your cash at any point and choose any property to buy, so long as it is within the stated value limits, is located in the UK and you plan to live in it yourself.
Cons, however, include the fact that you will not be able to use the bonus to pay your initial deposit. You are not allowed to open one if you have owned property before. You are only allowed to open one ISA per year and there is a limit to how much you can invest in a ‘Help to Buy’ account, just £2,400 per year, which is a lot less than a standard ISA. A minimum balance of £1,600 must be saved before the bonus will kick in.
Those on a variable rate will be vulnerable to fiscal change too. At the start of September, nine banks have reportedly slashed the rates investors earn on their ISA money by up to half, due in part to interest rates falling to a new record low in August. Another downside is that anyone buying a shared-ownership property will not qualify for the bonus at all if the property exceeds the scheme’s stated limits.