The Chancellor George Osborne’s 2015 budget announcement included a new incentive to encourage first-time buyers, namely help-to-buy ISAs, to be launched in Autumn this year. We take a look below on how this new scheme will work, its pros and cons, and how first-time buyers can make the most of it.
Overview of help-to-buy ISAs
The headline-grabbing soundbite is that this scheme allows individuals to save up for a deposit on a new house, as a first-time buyer, and receive a cash inventive from the government of up to £3,000. All well-and-good!
But, to earn the full £3,000, you need to save up £12,000 yourself, with the government contributing 25% to what you have saved. Another condition of the scheme is that the maximum amount you can save per month is £200, although you will be allowed to make a one-off contribution to the ISA of £1,000. All of which means it will take 4½ – 5 years to save enough to earn the maximum incentive.
The new ISA will operate at an individual level, so if you are buying your first house with somebody else you will both qualify for the incentive and collectively receive £6,000 towards your first property from the scheme.
Why has the help-to-buy ISA incentive been introduced?
Everybody knows that first-time buyers are finding it increasingly difficult to buy a property – a combination of rising house prices and greater deposit requirements from mortgage providers mean that for many it is simply not affordable to buy a house, despite mortgage rates being surprisingly cheap at present. A lack of first-time buyers is not in the long-term interests of the country, and hence George Osborne is trying to ease this burden.
There are other government schemes also available for first-time buyers, which generally seek to reduce your deposit to 5%, with an additional loan being supported by the government. Whilst positive, these other schemes have not had the take-up that was hoped for, mainly because interest rates on such mortgage arrangements can be quite high, reducing the benefit of a lower deposit requirement.
How will help-to-buy ISAs work in practice?
Nobody really knows, as they will only come into operation in Autumn, and the devil will be in the detail!
You will be able to withdraw the money put into the ISA should there be another reason you need the funds, but will only receive the government cash incentive if you use the savings to buy your first house. Whilst this makes sense, it is also canny politicking from the chancellor, as he will only need to find the money towards the end of the next parliament.
It is not yet clear what interest rate will be earned on the ISA, in addition to the government cash. Banks tend to like regular savers, so offer relatively attractive interest rates, but conversely the attraction of these ISAs is the government support, so there is less need for high interest rates. Time will tell, but the best advice will remain as always, shop around.
Are there any negatives?
As noted above, you will need to save up for the best part of 5 years to earn the maximum reward. In that time, house prices will have increased, and mortgage rates will almost certainly be higher, so you could be chasing your tail! It is certainly difficult to advise people to put off buying their first house, simply to earn more government money – whilst this may appeal, it is unlikely to be the best answer.
There is speculation that the scheme will increase house prices, making it harder again for people to get on the property ladder. The view at Myonlineestateagent.com is that the scheme is overstated, and it is unlikely that there will be a noticeable impact on the property market. Government schemes in this area have flattered to deceive, with a lower impact than planned, and the amounts involved are unlikely to stimulate high demand for first-time-buyer properties.
How can you make the most of the scheme?
If it encourages you to save, then there is an immediate benefit. At present there would appear to be few down-sides to opening a help-to-buy ISA if you are likely to be a first-time buyer in the next few years. Interest rates for your savings are likely to be lower than other more general ISA products, but if you shop around and the downside should be minimal.
With the government cash, the maximum house deposit you can save from these ISAs will be £15,000, plus whatever interest a bank may give on top. This still doesn’t represent a particularly high deposit for typical house prices, especially in London, so if you can, blend a help-to-buy ISA with other savings that can be combined to maximise your deposit.
Also consider that the bank of mum and dad can help! Rather than having to support children with a large one-off deposit, parents should consider setting up and funding, or part-funding, payments into such an ISA. For example, if children are going to university, having a help-to-buy ISA whilst getting educated can make a good start to a having a deposit for a property purchase upon graduation. Parents may be more able to afford the monthly payments, rather than a large lump-sum, especially if there is some sharing of the contribution.
Final comments – is it worth setting up a help-to-buy ISA?
Anything that encourages savings and supports first-time buyers is good. But the new help-to-buy scheme is not the panacea that some people believe – it takes time to save up the full amount to maximise “free” cash, and the property market will have moved on in that time. So, start saving early, and you will reap the best rewards.
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