Last chance to benefit from the government’s Help to Buy ISA
With the government’s Help to Buy ISA coming to an end on the 30th November 2019, now is your last chance to open the account, in order to earn a 25% bonus on your savings.
While the Help to Buy ISA is being withdrawn at the end of the month, those considering buying their first home should open one before its end date. Although the scheme closes to new savers on 30th November, those who already have a Help to Buy ISA, can continue saving into it for another ten years, giving a massive potential boost to a deposit. With less than two weeks to go before the deadline, savers must act now to take advantage of the government bonus.
For those that miss the deadline, the government’s Lifetime ISA (LISA), introduced in 2017, will still be available. The LISA allows a saver to put away up to £4,000 per year whilst receiving a 25% bonus. The money can be used for either a home purchase or retirement. Potential savers will incur penalties if their money is withdrawn before the age of 60 for any reason other than buying a home or being terminally ill. Savers should be aware the interest rates on offer for LISAs are usually not as competitive as those for a Help to Buy ISA.
The government Help to Buy ISA scheme was designed to help first-time buyers save for their deposit, while earning interest on their savings. In recent years, first-time buyers have faced challenging market conditions when trying to get on to the property ladder. With the UK House Price Index recording an average property value of £234,8531 and the Office of National Statistics reporting an average salary last year of £29,588,2 the gap between house prices and earnings has presented a difficult hurdle for many entrants to the market.
A significant barrier to home ownership is the task many face when saving for their deposit. With many first-time buyers already renting, accumulating a deposit can prove extremely difficult. Recognising the challenges potential buyers were facing, the government’s Help to Buy ISA, exclusively for first-time buyers, took some steps to help make home ownership more achievable.
The government savings scheme allows savers to put away up to £200 a month, whilst boosting these savings by 25%. For every £200 saved, a saver would receive a £50 bonus from the government, up to a maximum bonus of £3,000. The enhanced savings have helped many on to the property ladder and potential buyers must act now to ensure they don’t miss their opportunity.
Exploring the Help to Buy ISA and Lifetime ISA.
Help to Buy ISAs
This scheme is available to first-time buyers aged 16+. The account allows you to save up to £4,000, tax-free, within a single tax year. The government will effectively reward you by supplying you with an additional 25% of the amount you have saved in the Help to Buy ISA. Therefore, if you save the full £4,000, you will earn a bonus of £1,000 for that tax year.
Additional elements to the scheme:
- You can save up to £1,200 in the first month that you open the ISA. From then you can save a maximum of £200 a month.
- You can earn interest of up to 2.58%, in addition to receiving the government bonus. You will receive the government bonus at the time it comes to exchanging and completing on the property, which your solicitor will be able to advise you on.
- You need to save a minimum of £1,600 in order to receive a bonus (of which you would earn £400).
- The maximum bonus the government will give per person is £3,000, whereby you will need to have saved £12,000.
- If you are purchasing a property with someone else who is also a first-time buyer, you can each have your own Help to Buy ISA. However, if one of you has owned a property before, that person will not be entitled to a Help to Buy ISA.
- You will not receive the government bonus unless the money saved is used towards the purchase of a property. You can remove your funds from the ISA for something else but will not receive the government bonus. Furthermore, once you have withdrawn that money, you cannot use it again towards your ISA allowance.
- The ISA is capped on properties valued at £250,000 or less, or £450,000 if you’re buying in London and its surrounding areas.
- The ISA can be used on any residential mortgage, regardless of whether it’s a new build property or not, or part of a shared ownership scheme.
- The scheme is open to all mortgage lenders, meaning you’re not restricted to specific providers.
The scheme is designed so the government bonus is given straight to your solicitor or conveyancer, when you’re exchanging and completing on the property, and consolidated with your other funds for completion of the sale. This is to ensure the bonus you’ve earned is being used towards your first home and nothing else. Your solicitor or conveyancer will handle the legal aspects of the ISA and instruct you at what point you need to close the account. At this point you will need to withdraw your ISA funds into an account of your choice. As part of the account closure you will receive a closing statement, which you need to give to your solicitor or conveyancer for them to apply for your government bonus. For most ISA providers, this statement is sent via post, so ensure you factor this into your timeline for exchanging and completing on the property.
For more information on the Help to Buy ISA, click here.
Lifetime ISAs
The LISA is designed to help you save a deposit for your first home or for later in life. Eligibility requires you to be aged 18 – 39 years old. Like the Help to Buy ISA, you can save up to £4,000 each tax year as part of your total annual ISA allowance and the government will reward you with a 25% bonus of your savings. Therefore, should you save the full £4,000 for that tax year, you will receive a £1,000 government bonus.
One of the biggest differentiators between the Help to Buy ISA and LISA is the timing at which you received the government’s 25% bonus; for the Help to Buy ISA you receive the bonus when you are close to completing on the house purchase. With the LISA you receive the bonus six weeks after any top up of your savings, meaning you will likely see the benefits of the government bonus a lot sooner than you would with the other ISA product.
Since you can use your LISA savings for your first home and/ or retirement planning, you can only withdraw money penalty free if it’s for purchasing your first home and/or when you reach the age of 60. Withdrawing savings for any other reason will result in a 25% penalty charge from the government, so is something you must be aware of before opening a LISA.
Additional features to the LISA include:
- The maximum bonus you can receive from the government is £33,000. Bear in mind the maximum you can put in any single tax year is £4,000, so you will need to have put the maximum amount in for at least 32 years in order to receive a bonus of that size.For example, if you opened the account at 20 and put in £4,000 every year, you would have used up your allowance by the age of 52.
- You can use a LISA to keep your savings as cash or use it to invest in stocks and shares. However, the value of stocks and shares can rise as well as fall, so you might get back less than you put in, should you choose to invest.
- A LISA can be used to help purchase a property up to the value of £450,000.
- If you are purchasing a property with someone else who is also a first-time buyer, you can each have your own LISA. However, if one of you has owned a property before, that person will not be entitled to a LISA.
For more information on the Lifetime ISA, click here.
There are many other schemes beyond these government ISAs which can help you get onto the property ladder. Below we explore additional options:
To encourage building, due to the shortage of housing, the government introduced a Help to Buy scheme specifically for new build properties. This scheme applies to England residents only, but there are similar schemes in Northern Ireland, Scotland and Wales. Unlike the ISAs already discussed, you do not have to be a first-time buyer to be eligible for this scheme.
England’s Help to Buy (equity loan) scheme:
If purchasing a new build, you need to have a 5% deposit in order to qualify for an interest-free loan from the government, valued at 20% of the purchase price (40% within Greater London). This means you will need to secure a mortgage for the remaining 75% of the property’s value. The government’s loan is interest-free for the first five years only.
Borrowing 75% of the house value means you will likely achieve access to more competitive borrowing rates than you would with a 95% mortgage. However, this is an interest-only equity loan, meaning you are only repaying the interest and not the loan itself. When it comes to selling the property, the government’s share will remain the same, meaning the state will receive 20% of whatever the property’s value is at the time it comes to selling. This means you could be paying back the government more than you borrowed, should the property value rise.
Alternatively, should you wish to continue paying and living in the home after the first five years, you will then need to start paying interest on the amount loaned to you by the government. The interest you pay to the government is as follows:
- Years 1-5: Interest free
- Year 6: You start to pay interest on the value of 20% of the property at the time it was purchased. It doesn’t matter if the property has risen in value, you will only pay interest on the original amount loaned to you. The interest rate starts at 1.75%
- Year 7 and onwards: The rate will rise each subsequent year in line with the Retail Price Index (RPI), plus one percentage point. For example, if the RPI from May 2019 was 3%, the interest rate would be at 4%. Therefore, 4% of the original 1.75% interest rate is 0.07%. Add those together and you have the revised interest rate of 1.82%. The chart below gives a broader example of how the rates rise year on year.
| Year | Estimates RPI + 1% | Interest rate % |
|---|---|---|
| 1-5 | n/a | 0% |
| 6 | n/a | 1.75% |
| 7 | 4% | 1.82% |
| 8 | 4% | 1.89% |
| 9 | 4% | 1.97% |
| 10 | 4% | 2.05% |
| 15 | 4% | 2.13% |
This scheme is available until March 2021, meaning you need to have purchased a property under the scheme prior to that date in order to qualify for the equity loan.
For more information of the Help to Buy scheme, click here.
Different schemes are available in Scotland, Wales and Northern Ireland. For further information, click on the links below:
Northern Ireland’s Co-Ownership schemeScotland’s Help to Buy schemeWales’ Rent to Own scheme
These schemes are usually run by housing associations and allow purchasers to buy 25%-75% of a property’s value. The remaining share is effectively rented by the borrower. Further shares can be purchased, known as staircasing, until full property ownership is achieved. Once again, different rules apply to Northern Ireland, Scotland and Wales.
Eligibility is largely dependent on who is offering the scheme, and will be based on personal factors, such as income, the cost of local housing and in some cases, if you have children or not, as some areas prioritise families. There are no simple rules so it is advised that you reach out to your local housing association to see if they can accommodate your individual needs. However, as a rule of thumb, you’re more likely to succeed at getting onto such a scheme if your household has a combined annual income of £80,000 or less (£90,000 or less in London), as well as being:
- A first-time buyer
- You used to own a home but can’t afford to buy one now
- You’re an existing shared owner.3
There are additional variations of these schemes depending on other individual factors, such as:
Additional help for key workers:
Some local authorities offer additional help for key workers such as those that work in the police force, NHS nurses, teachers or military personnel. Eligibility varies between authorities so it’s worth checking what’s required within your local area.
Older people and disabled people:
The Older People’s Shared Ownership (OPSO) scheme is for those aged 55 or older, where you can only buy between 25% – 75% of your home. Once you own 75% you won’t have to pay rent on the remaining share.
More information on the OPSO scheme is available here.
The HOLD scheme, which stands for Home Ownership for People with Long-Term Disabilities, helps you buy a home for sale on a shared ownership basis if you have a long-term disability, again between 25% – 75% of the property value. You can only apply for this scheme if other home ownership properties don’t meet your needs. For example, if you needed a ground-floor property.
More information on the HOLD scheme is available here.
To qualify for both of the schemes, you must also meet the following criteria:
- An annual household income of £80,000 or less (£90,000 if in London).
- You must be either a first-time buyer, a previous homeowner but you cannot afford to buy one now, or an existing shared owner looking to move.
As is the case with the all variations of the Help to Buy scheme, when it comes to selling the property, the housing association will have a say over its share of the property.
Securing a shared ownership mortgage usually requires mortgage advice. Our advisers have extensive experience at arranging shared ownership mortgages so call us to see how we can help. In addition to arranging your mortgage, our advisers can assist with the associated paperwork involved in such a scheme. Alternatively, the government have more information on it here, or you can contact your local authority.
Starter Home scheme:
The government set out an initiative to provide 200,000 affordable new-build homes to first-time buyers in England by 2020. The properties are built on brownfield, which is ‘previously developed land that local planning authorities consider to be appropriate for residential development’.4 They will be sold at a 20% discount compared to the market price in the area, which means you will need to raise a mortgage at 80% of the property’s value, minus whatever deposit you have saved.
Typically, a house builder must pay local authorities £15,000 per house as part of their planning obligations, which is used to fund affordable housing and local infrastructure in the area. Under the Starter Home scheme, these fees are waived for the property developers, if they participate in the Start Home scheme and pass those savings onto buyers.
To be eligible you must be:
- Aged 23 – 40 years old
- Be a first-time buyer
- Have a combined annual income of £80,000 or less (£90,000 or less in London)
- Buying the house with a mortgage (cash buyers are not eligible).
Property values are capped at £450,000 in London and £250,000 outside of the capital. Furthermore, if you sell your home within the first five years of purchase, you will need to repay some or all of the 20% discounted under the scheme.
For more information on Starter Homes, click here.
It’s important you don’t overstretch yourself when getting onto the property ladder. You want to be able to enjoy yourself when you’re in your home and settled, rather than worrying about how to keep up with your monthly payments.
There are some additional options that can help you get there but ensure they are the right avenue for you by doing your research, as they could end up more expensive.
Asking a family member to act as guarantor:
Many first-time buyers rely on the ‘bank of mum and dad’ to help them get onto the property market. Legal & General reported in 2019 that the average contribution is £24,100.5 Typically people get help with their initial deposit, but there are also mortgages that can incorporate a parent, or family members, finances into the mortgage itself.
It’s essential to seek both mortgage and legal advice for such a mortgage and being completely clear on an agreement between you and that family member. Some mortgage providers consider a family member’s income as well as the person purchasing the property to help them get a bigger mortgage. The parents will not be listed as owners of the home, to avoid tax implications, but will have to prove that they can cover their own mortgage as well as their child’s mortgage (assuming the parents still have a mortgage of their own).
Alternatively, a parent can act as guarantor by undertaking cover repayments should the child default, or they can guarantee the extra portion over and above the amount covered by their child’s income.
Springboard mortgages:
Also known as a family offset mortgage, a springboard mortgage is another way to get help from a family member when embarking on to the property ladder. A springboard mortgage allows a buyer to use a 5% deposit and take out a 95% mortgage from a lender. In addition, a family member can deposit 10% into an account with the mortgage provider, which will cover any payments should the homebuyer fail to keep up with their own payments. The money will need to be held in that account for five years, where it can still earn a rate of interest. Once the five years are up, the family member can have that money back to use as they wish, meaning it is particularly good for those who want to help a family member out, but can’t afford to do so over the longer term; perhaps they need that money later in life for their retirement, for example. It also puts less of an onus on the ‘bank of mum and dad’ whereby they are lending money to their child, rather than giving it to them. Only certain lenders offer this sort of mortgage, which your mortgage adviser will be able to assist you with.
As an example, let’s say you purchase a house valued at £190,000. You pay a 5% deposit at £9,500 and get a 95% mortgage loan at £180,500. Your parents give a 20% deposit via a linked account to your mortgage, totalling £38,000, which can then earn interest. If the interest rate was at 2.75%, your parents could have £43,520.39 by the end of the five years, assuming you didn’t default on any of your mortgage payments.
Another alternative is for friends or family members to buy a property together. Depending on the lender, some allow up to four people to get a joint mortgage. Combining your salaries will likely put you in a far stronger position when it comes to purchasing a property, but it may also mean you require a bigger property to house all of you. It also means that a more expensive property will likely result in more stamp duty to pay. This handy stamp duty calculator will help you determine this.
You need to be clear on how you want to proceed with this type of mortgage and where each of you stand in the agreement. Once you are financially tied to that friend or family member, it is not always a straightforward case should you wish to split your financial commitments at a later date. For example, their credit rating will now affect your credit rating.
There are two ways in which you can enter the mortgage agreement;
- Joint owners: whereby you are equally liable for the property. That means should one of you default on payments, the other party, or parties, are expected to maintain payments.
- Tenants in common: this is where you divide the shares between all of those buying the property and are responsible for just your share. If for example, you were writing your will, you could arrange for your share in the property to be inherited by someone other than those you share the property with.
Joint ownership and tenants in common can also be applied to couples purchasing a property together under the more traditional residential mortgage. It may be particularly relevant in circumstances where each person has children with previous partners and wants to ensure financial security for their own children.
It is advised you think about the plans and timelines of those involved and prepare for every eventuality. For example, what to consider in the event one of the shareholders must move because of their job or they’ve met and moved in with a new partner. This could help with the often-difficult process of splitting assets further down the line.
As mate mortgages can vary per lender, it’s best you get in touch to discuss and assess your options.
We’re here to help
In most cases, knowing the best option for you and your circumstances can be overwhelming, particularly when there are so many options out there. That’s where we can help and put your mind at ease. We offer a fee-free, whole of market service. Book an appointment for an initial consultation where one of our expert mortgage advisers can outline your options for you and you have total freedom to choose whether or how you would like to progress. To book your appointment, simply call 01823 273880 or complete this form and one of our mortgage advisers will be in touch shortly.
1http://landregistry.data.gov.uk/app/ukhpi2https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/ bulletins/annualsurveyofhoursandearnings/2018#measuring-this-data3https://www.gov.uk/affordable-home-ownership-schemes/shared-ownership-scheme4https://www.propertyreporter.co.uk/finance/over-a-third-of-prospective-home-buyers-to-rely-on-bank-of-mum-and-dad.html5https://www.gov.uk/guidance/national-planning-policy-framework/annex-2-glossary
