Help to Buy Isas explained
By Marie Kemplay
Article 4 of 8
Help to Buy Isas explained
Discover how a Help to Buy Isa could not only help you save towards buying your first home, but earn you free cash from the government too.
Watch our two-minute video for a quick rundown on how Help to Buy Isas work, as well as their benefits and potential drawbacks.
- For more information on Help to Buy Isas, contact the Which? Money Helpline.
- For impartial advice on getting a mortgage based on your personal circumstances, call Which? Mortgage Advisers on 0808 252 7987.
What is a Help to Buy Isa?
Help to Buy Isas aim to give a helping hand to first-time buyers saving up for a mortgage deposit.
As with other Isas, any savings deposited in one won't be taxed, but the main benefit is that for every £200 you save, the government will pay you a £50 bonus towards the purchase price of a property.
This means the government will effectively give you a 25% top-up on savings of up to £12,000, so you could earn a maximum bonus of £3,000, which is tax-free.
The maximum amount you can pay into your Help to Buy Isa is £200 per calendar month. However, when you first open the account, you're allowed to make an additional contribution of £1,000, meaning you can save £1,200 in the first month.
You can withdraw money from your Help to Buy Isa if you need to, but your deposit allowance won't change. This means that if you contribute £200 at the start of the month and then withdraw it (or some of it), you won't be able to pay anything else in until the next calendar month because your £200 deposit allowance for the month has already been used.
Separately from the government contributions, cash in a Help to Buy Isa will earn interest from the bank in the same way as it would in any other Isa. This interest will count towards the balance the government bonus is based on. It will be up to banks and building societies to decide what interest rate to offer.
The national banks and building societies offering Help to Buy Isas are:
- Bank of Scotland
- Clydesdale Bank
- Newcastle Building Society
- Ulster Bank
- Virgin Money
- Yorkshire Bank
Before opening an account, it's also worth speaking to your local building society, as some offer Help to Buy Isas for local residents and existing customers.
How do I get a Help to Buy Isa?
To be eligible for a Help to Buy Isa, you need to be a first-time home buyer. So you can’t open one if you already own a property or have done in the past.
The government bonus will only be paid when you buy a property, so you won’t get the 25% top-up if you use the money for something else. You can use Help to Buy Isa savings to purchase a property worth up to £250,000 – or £450,000 if you're buying in London. Unlike other schemes, this isn't limited to new-build homes.
If you're saving up to buy a house with someone else, you can both open a Help to Buy Isa as the bonus is paid per person rather than per property, which means you can jointly earn a bonus of up to £6,000.
If the person you're buying with is not a first-time buyer, you can open a Help to Buy Isa and will qualify for the government bonus on your own part of the deposit, but they won't be able to do so for their share.
You can open a Help to Buy Isa any time between December 2015 and December 2019.
Help to Buy Isa-holders can take out any kind of residential mortgage (but not a buy-to-let mortgage).
Find out more: First-time buyer mortgages – what products are on offer for first-time buyers and how much of a mortgage will you be able to afford?
How does the bonus get paid on a Help to Buy Isa?
- Save up for your mortgage deposit using a Help to Buy Isa*.
- When you're ready to buy your first home, close the account. You'll then receive a closing letter from the Isa manager.
- Give the closing letter to your property solicitor or conveyancer.
- They will use the letter to apply for your government bonus.
- The bonus is transferred to your solicitor. They'll then complete the purchase of your home using the full bonus amount.
The bonus will be calculated based on the total amount of money in your Help to Buy Isa at the time of closing, including any interest you've earned from the bank.
You can only use your Help to Buy Isa bonus for the purchase of the property itself – you can't put it towards other costs to do with buying, such as conveyancing fees.
It's worth noting that you'll probably have to pay an exchange deposit of 10% when you exchange contracts with the person you're buying from (the point at which you legally commit to buying the property) – and, according to the Treasury, you won't be able to put the government bonus towards this, as the bonus is only paid on completion. The full amount of your exchange deposit will need to come from an alternative source.
*Not all of your deposit needs to be held in your Help to Buy Isa, just the amount that you want to be taken into account when the bonus is calculated.
What if something goes wrong when I'm buying the property?
If your home purchase doesn't go through after the solicitor has received your government bonus, you can reopen a Help to Buy Isa.
You'll need to ask your solicitor for a 'purchase failure notification' document confirming that the purchase didn't complete, and show it to a bank or building society, who will open an account for you.
In this situation, you'll be able to deposit the full amount you've saved as a lump sum – so if you'd saved up £12,000, you can put that all into the Help to Buy Isa at once.
What are the restrictions around Help to Buy Isas?
For anyone saving up for a mortgage deposit, a Help to Buy Isa is a very attractive option. However, there are some restrictions:
- Apart from the first month, when you can put in an extra £1,000, you can only save up to £200 a month (£2,400 a year) in a Help to Buy Isa.
- This means that it would take more than four-and-a-half years of saving into a Help to Buy Isa to benefit from the maximum £3,000 government bonus, so it may not be the right product for you if you’d like to buy a property sooner than that. However, you can still earn part of the bonus by saving for a shorter amount of time.
- You will need to save at least £1,600 in a Help to Buy Isa to qualify for a government top-up, as the minimum bonus payment is £400.
- Help to Buy Isas can only be held by people aged 16 or over – so if you want to save money for your child, a Help to Buy Isa will only work if your child is 16 or above and they open it in their own name (you can then pay into the account).
- Unlike normal cash Isas, you can only have one Help to Buy Isa open at any one time, but you can transfer between different providers to get the best interest rates.
In the 2016 Budget, the Chancellor announced a new lifetime Isa, to be launched in April 2017. This Isa is designed to help people under 40 buy their first home or save for retirement. Like the Help to Buy Isa, it will offer a government bonus on savings.
With lifetime Isas, you can save up to £4,000 a year, and the government will top up your savings by 25%, meaning you earn an extra £1 for every £4 you save. The money can be put towards first homes costing up to £450,000.
During the 2017-18 tax year, anyone with a Help to Buy Isa will be allowed to transfer their savings into a lifetime Isa. You can save into both, but can only use the government bonus from one account to buy your first home.
Help to Buy Isas will remain available until November 2019.
- Last updated: September 2016
- Updated by: Marie Kemplay