Are you’re dreaming of buying your first home, but unsure where to start.
The government’s Help to Buy ISA and the upcoming launch of the Lifetime ISA both aim to help first-time buyers on to the property ladder.
But how do these government bonus schemes work? Don’t worry - we’ll talk you through all you need to know.
Help to Buy ISA
A Help to Buy ISA works in a similar way to a regular ISA - you’re not taxed on the interest you make on your savings. And just like the rules surrounding any other ISA, you can’t open a Help to Buy ISA and a regular cash ISA within the same financial tax year.
But the Help to Buy scheme comes with a significant added benefit that other ISAs don’t. With this type of ISA, the government will top up your savings by 25%. Great news if you’re a first-time buyer hoping to bag your dream home.
With a Help to Buy ISA, you can save up to £200 a month, so the maximum government contribution you can get is £50 a month. In total, the government will contribute up to a maximum of £3,000 on a £12,000 savings pot.
To enjoy the benefit of the government contribution, you’ll need to save at least £1,600. This will give you a boost of £400.
And if you’re planning to buy your first property with your partner, you can both benefit from the government bonus - so long as you’re both first-time buyers. By setting up two Help to Buy ISAs that you both contribute to, you could qualify for a maximum of £6,000 combined from the government bonus.
What can I use it for?
With a Help to Buy ISA, the government will only release their contribution once the sale of the property is completed. This means you’ll be unable to use the bonus as part of the initial deposit when you exchange contracts or any other costs associated with the property, such as solicitor fees.
However, it could still be very valuable to you. Instead, you could use the government bonus towards your mortgage payments.
But if you’re looking for an ISA that can help kick-start your savings to help you reach your target deposit goal sooner, a Lifetime ISA may be more suitable. Let’s take a closer look.
Due to launch in April 2017, the Lifetime ISA comes as an alternative to the Help to Buy ISA. And the good news is it comes without the limit of being unable to use the bonus towards your initial deposit. With a Lifetime ISA, first-time buyers can put the 25% government boost towards their deposit.
As long as you’re a first-time buyer and the property you plan to purchase is not worth more than £450,000, the savings in your Lifetime ISA can be used to help fund the purchase of your dream home.
You can save more money into a Lifetime ISA than a Help to Buy ISA – up to £4,000 a year. This means you could qualify for a maximum government top-up of £1,000 a year.
So from next spring, if you’re aged between 18 and 40, you have the option of saving into a Lifetime ISA until you’re 50. And while you could withdraw your savings and the government contribution to help buy your first home, the other option is to carry on saving for your retirement. Find out more about this option here.
Which is for me?
While you’ll still receive the 25% government bonus with a Help to Buy ISA, you can’t use it as part of your actual deposit. Given this, a Lifetime ISA may be more suited to savers who wish to put the savings boost towards buying their first home.
If you open a Lifetime ISA, you’ll be able to use money from the government contribution to pay for legal fees and other moving costs, as well as to boost your initial deposit.
So, unlike with a Help to Buy ISA, with a Lifetime ISA you’ll receive the contribution upon the exchange of contracts rather than when the sale of the property has been completed.
"Both ISAs can help you save what you need quicker and reduce the amount you need to borrow."
If you do decide that the Lifetime ISA is for you, it still could be worth opening a Help to Buy ISA in the meantime. This way you can make sure that you’re not missing out on the 25% bonus. After its launch, you can then transfer your savings into a Lifetime ISA.
You can take money out of both ISAs whenever you want. If you decide not to buy your first home, you don’t lose the money you’ve saved in a Help to Buy ISA – you just miss out on the boost to your savings. But be aware that if you withdraw cash from a Lifetime ISA before your 60th birthday and do not use the savings to buy your first home, you’ll lose the government bonus and have to pay a 5% charge.
If you’re a first-time buyer and saving money each month, it’s worth considering these government initiatives. Both ISAs can help you save what you need quicker and reduce the amount you need to borrow.
Disclaimer: All information and links are correct at the time of publishing.