What is a Help to Buy ISA?
Written by Adele MacGregor
5th Mar 2020 (Last updated on 1st Apr 2020) 7 minute read
The Help to Buy ISA is a savings account for first-time buyers which is supplemented by a 25% government bonus.
Although it is no longer possible to open a new Help to Buy ISA, those who currently have one of these accounts will be able to continue saving until 2029.
In this guide, Compare My Move explains the Help to Buy ISA, what you need to know and how you can best utilise your account for buying your first home.
What is the Help to Buy ISA?
The Help to Buy ISA was introduced by the UK government in 2015 to help first-time buyers get on the property ladder.
The Help to Buy: ISA is a savings account which benefits from a government bonus - boosting your savings by 25%. For example, for every £200 saved, you will receive a government bonus of £50.
The government made the decision to stop new accounts being opened as of 30 November 2019. Those who opened a Help to Buy ISA before this date will be able to continue saving into their accounts until November 2029. It’s worth noting that you are not restricted to using a Help to Buy mortgage with a Help to Buy ISA. You will have access to any residential mortgage, except for a buy-to-let mortgage.
Who is the Help to Buy ISA for?
To have opened a Help to Buy ISA you will have needed to be a first-time buyer and over the age of sixteen.
Those who opened a Help to Buy ISA before the deadline are able to use it to purchase a home worth up to £250,000 - or £450,000 in London.
You cannot use the Help to Buy ISA if you’re going to rent the property or if it is outside of the UK. You must not have owned a property in the past, including overseas.
How Much Can You Put in a Help to Buy ISA?
Following the first instalment of up to £1,200, you can contribute up to £200 each month to your Help to Buy up until November 2029.
The minimum government bonus is £400 which means you will need to save at least £1,600 into your Help to Buy ISA before claiming the bonus.
The maximum amount of government bonus is £3,000. For you to receive this amount you will need to have saved £12,000 before buying your home.
You don’t have to save money every month, however you can roll over your allowance. For example, if you don’t have money one month, you can’t put double the amount into your account the next month. Each month the amount you pay in is up to you, providing it is under the £200 limit.
Does a Help to Buy ISA Earn Interest?
Besides receiving the government bonus, you will also be able to earn interest on the money you put into your Help to Buy ISA. The interest rates will vary and are set by each provider. It’s also important to note that you won’t earn interest on the government bonus.
As interest rates change, you are able to switch from one provider to another to get the best deal. However, make sure you do the switch through your ISA provider to avoid accidentally withdrawing the money. This would result in the amount losing its tax-free status and eligibility to receive the government bonus.
How Can I Access the Government Bonus?
By this point, you will have been liaising with your conveyancer fairly regularly on various matters in the house buying process. Once they receive the bonus it will be added to the funds you are putting towards your home.
You must claim your bonus by 1 December 2030.
What Can I Spend the Bonus On?
The Help to Buy ISA bonus can be used towards a property costing £250,000 or less across the UK - or £450,000 or less within London. The bonus will go towards the deposit at completion - often referred to as the mortgage deposit.
The mortgage deposit is the final deposit where you legally become the property owner. It also helps reduce the amount you need to borrow, cutting the cost of your mortgage rate, too.
As you will receive the bonus once the sale is completed, you won’t be able to use the bonus for the home exchange deposit used to secure the property. Although you can use the money you’ve saved for the exchange deposit, you cannot use the bonus.
What If I’m Buying With Someone Else?
When buying a property with someone else - be it a family member, partner or friend - you are still able to use the Help to Buy ISA. The Help to Buy ISA is per individual, not per property, so more than one Help to Buy ISA account can be used to buy a home.
For example, if you are buying a property with your partner, providing you are both first-time buyers, you can both use a Help to Buy ISA to buy a property. If you both save the maximum amount, you can gain up to £6000 bonus from the government between you.
It’s also possible to use the Help to Buy ISA to purchase a property if only one of the buyers is a first-time buyer. If you are buying with someone who has previously owned a property, you are still able to use the Help to Buy ISA and the government bonus for your share of the property. This is, of course, providing you meet the requirements of the bonus.
What if the Sale Falls Through?
If the sale doesn’t go through after you have closed your Help to Buy: ISA, you can reopen your account by confirming your purchase didn’t complete.
Your solicitor or conveyancer can supply you with a Purchase Failure Notification to take to your bank, building society or credit union and they will reopen the account for you. In this instance, you will be able to deposit your money as a lump sum.
What is the Difference Between a Help to Buy ISA and a Lifetime ISA?
Although it’s no longer possible to open a Help to Buy ISA, first-time buyers can still take advantage of the Lifetime ISA (LISA). The Lifetime ISA is an Individual Savings Account which also benefits from a 25% government bonus and is open to UK residents between the ages of 18 to 40.
You are able to put up to £4,000 a year into this account up until you turn 50, at which point you will also no longer receive the government bonus on your savings.
The Lifetime ISA differs to the Help to Buy: ISA in a number of ways, namely that this account is not limited to first-time buyers. Unlike the Help to Buy: ISA you cannot benefit from the government bonus unless you buy a property at least 12 months after opening your account. It’s possible to switch from your Help to Buy ISA to a Lifetime ISA but the transfer will count towards the annual limit of £4,000. Any transferred funds will qualify for the Lifetime ISA bonus providing you stick to the annual contribution limits. If you do switch, you will no longer be entitled to the Help to Buy bonus.
What is the Difference Between a Help to Buy ISA and the Help to Buy Schemes?
The Help to Buy ISA should not be confused with the Help to Buy: Equity Scheme or the Help to Buy: Shared Ownership.
The Help to Buy: Equity Loan is a shared equity scheme that is available for those looking to buy a new-build home. Typically a deposit of 5% is required and the government or developer lends the rest of the deposit - up to a further 20%.
The Help to Buy: Shared Ownership offers hopeful homeowners the chance to buy a share of a home (between 25% and 75% of the home’s value) and pay rent on the remaining share.
If you would like to read more concerning the differences between the shared equity and shared ownership schemes, Compare My Move have created a helpful article further discussing the two schemes and how they could help different people.
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