If your New Year resolutions include saving to buy your first home, a Help to Buy Isa might be a key component of your plan. These tax-free savings accounts offer interest rates of up to four per cent plus a 25 per cent bonus from the Government worth up to £3,000.
The accounts are a "no-brainer" for first-time buyers saving for a mortgage deposit, according to Martin Lewis, of Moneysavingexpert.com. "Nothing comes close to the fact they're adding 25 per cent on top," he says.
Help to Buy Isas launched last month and are available from various banks and building societies. Currently, Halifax offers the highest interest rate at four per cent, followed by Virgin Money at three per cent, with a number of others paying about two per cent (see table).
You can put up to £1,200 into a Help to Buy Isa when you first open the account, then up to £200 a month. The 25 per cent bonus, calculated on the overall account balance including the interest, is added by the Government when you come to buy your home.
HOW TO BAG YOUR BONUS
You need to have £1,600 saved in a Help to Buy Isa to qualify for the minimum bonus of £400. To get the maximum £3,000 top-up, you would need to build up a balance of at least £12,000.
And, while you can only have one Help to Buy Isa, if you are buying with another first-time buyer you can both have an account and jointly earn a bonus of up to £6,000.
"In effect, this is free cash from the Government and anyone who is aspiring to buy their first home would be mad not to take one out," says Kevin White, UK head of financial planning at the DEVERE Group financial consultancy.
You can get the bonus for properties costing up to £450,000 in the capital, or up to £250,000 elsewhere — but not for a buy to let.
Having a Help to Buy Isa with a particular bank doesn't mean you have to take out your mortgage with them. The accounts can also be used with Help to Buy mortgages and other Government home-buying initiatives.
"The worst risk is you decide against buying a house, or buy a non-qualifying one. But even then, all that means is you don't get the bonus," says Moneysavingexpert.com's Lewis. "With Help to Buy Isa interest rates as high as four per cent tax free, it's still a pretty decent option."
First-time buyers should take out a Help to Buy Isa even if they are planning to buy in the next few months and have saved for a deposit, say experts. Someone opening an account now could put in the £1,600 required for the £400 minimum bonus by March 1. "If there are two of you buying for the first time and you each save £1,600, then your bonus will be £800 — that's got to be worth it," says savings analyst Andrew Hagger, of Moneycomms.co. uk. However, the £200 monthly savings limit for the Isa means it is likely to take at least four years for an individual to amass £12,000 to receive the maximum £3,000 top-up. And saving for a year in a Help to Buy Isa would provide at most a few thousand pounds — including the bonus — towards a deposit. Experts say that with first-time buyers in the capital typically needing tens of thousands of pounds for a deposit, they should be looking at more than just a Help to Buy Isa to build up savings.
IT COULD PAY TO SPLIT
There are restrictions around opening a normal cash Isa for this tax year as well as a Help to Buy Isa. But some providers — including Nationwide and Aldermore — allow savers to have both types via a "split" or "portfolio" Isa, up to a combined savings limit of £15,240.
Elsewhere, Santander pays three per cent on balances of between £3,000 and £20,000 in its 123 current account, while some banks and building societies have regular savings accounts which can offer rates as high as six per cent. However, investing in the stock market is risky, as share prices could have fallen by the time you need the funds for your purchase.
HELP TO BUY ISA: THE LOWDOWN
- You can save £1,200 in the first month of holding your Help to Buy Isa, then £200 a month thereafter. When you buy a home, the Government adds a bonus of 25 per cent of the balance.
- You need to save at least £1,600 to get a bonus, which would be £400. You could do that in three months.
- To get the maximum bonus of £3,000, you would need to save £12,000, including interest.
- Only people who have never owned a property can have a Help to Buy Isa. If you are buying with another first-time buyer, you can both have an account and each get a bonus.
- You can get the bonus on properties costing up to £450,000 in London, or up to £250,000 elsewhere.
- You don't have to use the Isa for a deposit. You can withdraw cash from the account at any time. You would still get the interest, but not the bonus.