Mortgage news

Time is ticking

With the government’s Help to Buy ISA coming to an end on the 30th November 2019, now is your last chance to open the account, in order to earn a 25% bonus on your savings.

While the Help to Buy ISA is being withdrawn at the end of the month, those considering buying their first home should open one before its end date. Although the scheme closes to new savers on 30th November, those who already have a Help to Buy ISA, can continue saving into it for another ten years, giving a massive potential boost to a deposit. With less than two weeks to go before the deadline, savers must act now to take advantage of the government bonus.

For those that miss the deadline, the government’s Lifetime ISA (LISA), introduced in 2017, will still be available. The LISA allows a saver to put away up to £4,000 per year whilst receiving a 25% bonus. The money can be used for either a home purchase or retirement. Potential savers will incur penalties if their money is withdrawn before the age of 60 for any reason other than buying a home or being terminally ill. Savers should be aware the interest rates on offer for LISAs are usually not as competitive as those for a Help to Buy ISA.

The government Help to Buy ISA scheme was designed to help first-time buyers save for their deposit, while earning interest on their savings. In recent years, first-time buyers have faced challenging market conditions when trying to get on to the property ladder. With the UK House Price Index recording an average property value of £234,8531 and the Office of National Statistics reporting an average salary last year of £29,588,2 the gap between house prices and earnings has presented a difficult hurdle for many entrants to the market.

A significant barrier to home ownership is the task many face when saving for their deposit. With many first-time buyers already renting, accumulating a deposit can prove extremely difficult. Recognising the challenges potential buyers were facing, the government’s Help to Buy ISA, exclusively for first-time buyers, took some steps to help make home ownership more achievable.

The government savings scheme allows savers to put away up to £200 a month, whilst boosting these savings by 25%. For every £200 saved, a saver would receive a £50 bonus from the government, up to a maximum bonus of £3,000. The enhanced savings have helped many on to the property ladder and potential buyers must act now to ensure they don’t miss their opportunity.

Exploring the Help to Buy ISA and Lifetime ISA.

Help to Buy ISAs

This scheme is available to first-time buyers aged 16+. The account allows you to save up to £4,000, tax-free, within a single tax year. The government will effectively reward you by supplying you with an additional 25% of the amount you have saved in the Help to Buy ISA. Therefore, if you save the full £4,000, you will earn a bonus of £1,000 for that tax year.

Additional elements to the scheme:

  • You can save up to £1,200 in the first month that you open the ISA. From then you can save a maximum of £200 a month.
  • You can earn interest of up to 2.58%, in addition to receiving the government bonus. You will receive the government bonus at the time it comes to exchanging and completing on the property, which your solicitor will be able to advise you on.
  • You need to save a minimum of £1,600 in order to receive a bonus (of which you would earn £400).
  • The maximum bonus the government will give per person is £3,000, whereby you will need to have saved £12,000.
  • If you are purchasing a property with someone else who is also a first-time buyer, you can each have your own Help to Buy ISA. However, if one of you has owned a property before, that person will not be entitled to a Help to Buy ISA.
  • You will not receive the government bonus unless the money saved is used towards the purchase of a property. You can remove your funds from the ISA for something else but will not receive the government bonus. Furthermore, once you have withdrawn that money, you cannot use it again towards your ISA allowance.
  • The ISA is capped on properties valued at £250,000 or less, or £450,000 if you’re buying in London and its surrounding areas.
  • The ISA can be used on any residential mortgage, regardless of whether it’s a new build property or not, or part of a shared ownership scheme.
  • The scheme is open to all mortgage lenders, meaning you’re not restricted to specific providers.

The scheme is designed so the government bonus is given straight to your solicitor or conveyancer, when you’re exchanging and completing on the property, and consolidated with your other funds for completion of the sale. This is to ensure the bonus you’ve earned is being used towards your first home and nothing else. Your solicitor or conveyancer will handle the legal aspects of the ISA and instruct you at what point you need to close the account. At this point you will need to withdraw your ISA funds into an account of your choice. As part of the account closure you will receive a closing statement, which you need to give to your solicitor or conveyancer for them to apply for your government bonus. For most ISA providers, this statement is sent via post, so ensure you factor this into your timeline for exchanging and completing on the property.

For more information on the Help to Buy ISA, click here.

Lifetime ISAs

The LISA is designed to help you save a deposit for your first home or for later in life. Eligibility requires you to be aged 18 – 39 years old. Like the Help to Buy ISA, you can save up to £4,000 each tax year as part of your total annual ISA allowance and the government will reward you with a 25% bonus of your savings. Therefore, should you save the full £4,000 for that tax year, you will receive a £1,000 government bonus.

One of the biggest differentiators between the Help to Buy ISA and LISA is the timing at which you received the government’s 25% bonus; for the Help to Buy ISA you receive the bonus when you are close to completing on the house purchase. With the LISA you receive the bonus six weeks after any top up of your savings, meaning you will likely see the benefits of the government bonus a lot sooner than you would with the other ISA product.

Since you can use your LISA savings for your first home and/ or retirement planning, you can only withdraw money penalty free if it’s for purchasing your first home and/or when you reach the age of 60. Withdrawing savings for any other reason will result in a 25% penalty charge from the government, so is something you must be aware of before opening a LISA.

Additional features to the LISA include:

  • The maximum bonus you can receive from the government is £33,000. Bear in mind the maximum you can put in any single tax year is £4,000, so you will need to have put the maximum amount in for at least 32 years in order to receive a bonus of that size.For example, if you opened the account at 20 and put in £4,000 every year, you would have used up your allowance by the age of 52.
  • You can use a LISA to keep your savings as cash or use it to invest in stocks and shares. However, the value of stocks and shares can rise as well as fall, so you might get back less than you put in, should you choose to invest.
  • A LISA can be used to help purchase a property up to the value of £450,000.
  • If you are purchasing a property with someone else who is also a first-time buyer, you can each have your own LISA. However, if one of you has owned a property before, that person will not be entitled to a LISA.

For more information on the Lifetime ISA, click here.

There are many other schemes beyond these government ISAs which can help you get onto the property ladder. Below we explore additional options: