Last week Help to Buy Isas hit the markets. For anyone saving for their first home these accounts should be a vital part of your savings plan.
If you have at least £1,600 in one of these accounts when you buy a home the government will give you an extra 25 per cent. The most the government will pay out is £3,000 per account.
Even if you aren’t currently saving for a house a Help-to-Buy Isa could be worth opening. The interest rates are attractive and you have instant access to your cash if you need it for something. Plus, you get the added bonus of a 25 per cent boost if you do decide to use the money to buy a house later.
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Here we run through the best rates available on the market if you do want to open an account.
The best overall Help-to-Buy ISA
Halifax have so far launched the top-paying account with an interest rate of 4 per cent. Just remember that you can put up to £1,200 into the account in the first month then a maximum of £200 a month after that. Those are the deposit rules for all Help to Buy Isas.
It is also worth noting that you can’t open joint Help-to-Buy Isas but everyone can have one, so you and your partner could open one each. That means couples could get a £6,000 helping hand from the government when they buy a house.
The best if you’ve already opened a cash Isa this year
As Help to Buy Isas are classified as cash Isas, you can’t open a separate cash account in the same tax year that you open a Help to Buy version. This means if you have already opened a cash Isa since 6 April 2015, technically you can’t open a Help to Buy Isa until 6 April 2016. But some banks and building societies are offering a way around the rules.
They are offering ‘split Isas’. This means your Help to Buy Isa and you cash Isa are held in the same wrapper, allowing you to have both. Just remember your ISA allowance is £15,240 this year, so you can’t end up with more than that in aggregate between the two.
Nationwide offer the best rate on split Isas with a Help to Buy rate of 2 per cent - well below the market leader for a straightforwrd option. So, if you’ve already opened a cash ISA this tax year you can transfer it to Nationwide and open a Help to Buy Isa with the building society at the same time.
It’s worth noting that if the cash ISA you’ve opened this tax year contains less than £1,200, you could just transfer the money to a Help to Buy ISA and avoid the hassle, and lower rates, offered by split ISAs.
What if a better deal comes along?
At present only 13 banks and building societies have launched their Help to Buy Isas and there are some big names such as First Direct and TSB who have yet to join the party. This means there is a chance a better deal will appear.
Bu, you are allowed to transfer your Help to Buy ISA to another provider. So, if a dazzling interest rate hits the market after you open your account you can always transfer.
Help to Buy Isas: how do they work and where are the best deals?
1 December
From today there is a new member of the Isa family. In an effort to help first-time buyers the government has introduced the Help to Buy Isa – and banks and building societies have rolled out their initial offers to customers.
Here’s everything we know about it so far.
What is it?
In simple terms, it's a government-back savings account with the usual Isa tax-sheltering benefits, but which also pays a 25 per cent 'bonus'.
The maximum bonus is capped at £50 a month if you pay in £200 - and at £3,000 in total. It means couples looking to buy their first home could get a £6,000 government payout to help them on their way.
The bonus is paid to your solicitor when you are ready to buy a house.
Who can use it?
The accounts will be operated through high street banks and building societies. So far nine lenders, including bigger high street names and niche players, have declared their hand on a day-one deal, with rates ranging from two per cent to an impressive four per cent.
The Daily Telegraph points out you do not need to take out your eventual mortgage with the bank providing your Isa. You will be able to open an account if you have never owned a property before and are over 16.
How does it work?
You can open the account with an initial deposit of up to £1,000, then save up to £200 a month after that.
There are no limits on withdrawals so if you need the money for something else you can take it, although the government bonuses are not added until the end and only paid towards a house deposit through a solicitor.
The accounts will earn interest, which is proving to be fairly generous as “banks and building societies are keen to tempt first-time buyers because they make money from selling them mortgages,” says Anna Bowes of Savingschampion.co.uk in the Telegraph. The interest you earn will be tax-free like with a normal cash Isa.
When you are ready to buy a home you close the account and your bank or building society will give you a closing letter. You give this to the solicitor you are using to buy your home and they will be able to apply online for the bonus to use to complete the deal.
The catches?
The minimum bonus payout is £400 so you need to save at least £1,600 into your account before you close it. The maximum bonus is £3,000, but you would need to save £12,000 to earn that which would take up to five years.
Couples can each open an account allowing them to save up to £24,000 tax-free, with a £6,000 bonus when it’s time to buy a property.
The house you can buy must be worth no more than £250,000, or £450,000 in London. You are not allowed to subsequently rent out the property, the Financial Times says even if you live in it first and then subsequently move out.
Finally, it should be noted that the Help to Buy Isa is treated like a Cash Isa – and under those rules you cannot open more than one account in a single year. So if you open a Help to Buy Isa, you won't be able to start a standard cash Isa until next April.
Who is offering the best deal?
So far the market leader by a wide margin is Halifax, which is offering four per cent interest to new and existing customers alike. Rates are generally better than on standard Isas because, as previously stated, banks are keen to secure first-time buyer business – and the money is likely to be left untouched as it is ear-marked for a deposit. Providers will probably enforce this with access restrictions.
Elsewhere Virgin Money is offering a three per cent rate and Barclays is offering 2.25 per cent. Aldermore, HSBC, Lloyds, Nationwide, NatWest are all offering two per cent to new and existing customers, while Santander is offering two per cent to existing customers and 1.5 per cent to newcomers.
Check the terms of the account for restrictions that might justify the lower rates being offered by some.
Should you get one?
A Help to Buy Isa is “a must for anyone saving to buy their first home,” says Ruth Lythe in the Daily Mail. If you don’t open one then you are effectively turning down free money.
Even if you aren’t considering buying a home at the moment it may be worth keeping an eye on Help to Buy Isas when they launch on 1 December. The interest rates on them could be generous so if you’ve never owned property before, they could be a good way to grab a top of the table interest rate.
You can use them as a savings account and if in the future you decide to buy you’ll be able to use the bonus.
A Christmas gift?
Alternatively, you may want to consider helping your child or grandchild by funding their Help-to-Buy ISA. If you’ve maxed out your own annual Isa limit this is a way to tuck a bit more cash away from the taxman.
The account has to be in their name, but you can put the money in and your child or grandchild will get some help with their housing savings and you could reduce your potential inheritance tax bill too.
“It’s a great way to bolster your youngsters’ financial security as they grow up,” says Laura Whitcombe in The Spectator.
“The enforced four-year-plus timeline [how long it would take to save £12,000 at £200 a month] works nicely with gifting rules for inheritance tax purposes… You’re allowed to gift £3,000 each year; so over four years, you can give your family member the £12,000 maximum Help to Buy Isa contribution, reducing your estate by the same amount.”
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