Help To Buy ISA: What you need to know (25% from the taxman)

April 21, 2015

This year’s budget was widely reported as the ‘budget for savers’. A new personal savings allowance, an increase in the flexibility of your ISA, and the headline-grabbing pension freedoms.

But sitting quietly at the back, with its hand raised but the teacher not looking, was the new Help to Buy ISA, which had to sit by and watch as the pension reforms took the spotlight. So did we all miss a trick by letting this new little piece of info go by? Let’s look into it a little more.

What is a Help To Buy ISA?

Well, if you’re a first-time home buyer aged 16 or over, you’re eligible for a cash boost from the Government towards buying your first home if you save into this new type of ISA. Each month, you can save up to £200 and the Government will add another 25% to the pot. Save £200, and you’ll get an extra £50 from Downing Street. You can also open the account with up to £1,000, which will immediately get you a £250 bonus.

When you think about it, it’s pretty much the equivalent of receiving 25% growth from day one…funded by the taxman!

Is it any good?

Well, yes and no. Let’s start with the positives. It’s something for nothing! If you’re thinking of saving for a house, or you are in the process of doing so, here’s a scheme that is designed to give you a little extra help. You can also take out any type of residential mortgage deal that you want – it doesn’t necessarily have to be a Help to Buy mortgage. Plus, you don’t have to buy a new build home – as long as it’s your first, you’re eligible.

In short, if you save the maximum each month (£200) and put in £1,000 at the start, you can save £12,000 with the Government adding a further £3,000. So, with £15,000 in your pot, you’ve got yourself a decent contribution to a deposit on a house. Perhaps…

So there’s a catch?

Not a catch, per se, but there’s a few things which we think cloud the decision whether or not to take out one of these ISAs. Firstly, you’re only allowed to take out one ISA a year, which means if you do elect to go down the Help To Buy route, you can’t put any money into another cash ISA. But, the news that from 2016 basic rate taxpayers can earn £1,000 interest tax-free in a standard savings account will temper that downside slightly. And you could still pay into a stocks and shares ISA.

Now, to save up the maximum £12,000 will take five years at £200 a month. Who’s to say that house prices won’t rocket in those five years, leaving your £15,000 for a deposit looking rather forlorn. And one quirk of the ISA is that you only get the Government’s slice when you actually buy a home – it’ll never be in your ISA account. What if things change? What if you can’t afford a house anymore? It seems to us that there’s still a little uncertainty here.

Should you or shouldn’t you…

As with most things financial, the final decision is up to you. If you’re planning to buy a home, it’s definitely worth looking into the scheme, especially if you live in parts of the country which are likely to see more modest price rises over the next five years (rather than London, for example, which is always an anomaly). But, do you really want to give up your full cash ISA allowance? Are you definitely planning to buy? Could you perhaps be better off renting? Make sure that you consider the upsides as well as downsides of the scheme before you decide.

 

This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.

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