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First Time Buyer Finances: Help to Buy ISA

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The 2015 Budget brought good news for first time buyers, in the shape of a new savings scheme, the Help To Buy ISA. But what will the overall impact of the Chancellor’s decisions be on the housing market? Kay Hill talks to industry experts.

Listening to the Budget is not normally the most cheerful of occupations, but first time buyers must surely have raised a smile on hearing that they could be handed up to £3,000 of public money just for buying a house. The Government’s new Help to Buy ISA was the most startling rabbit-out-of-a-hat trick in Chancellor George Osborne’s final Budget before the election. In a nutshell, the scheme aims to make it easier to get on to the housing ladder 
by giving first time buyers £50 for every £200 they save, up to a maximum of £3,000 on £12,000 worth of savings.

The devil is in the detail, of course. In particular, do note that Mr Osborne won’t be handing over free money, just in case the lure of a Lamborghini proved greater than the temptation of a terrace. Instead, the bonus will be paid directly to a mortgage company when the purchase goes through.

Anyone who starts a Help to Buy ISA, which only allows deposits of up to £2,400 a year, cannot open or add to a Cash ISA in the same financial year, so they can’t take advantage of the new higher £15,240 ISA savings rate. However, as the Budget also announced that all basic rate taxpayers will be able to receive up to £1,000 interest, tax free, from April 2016 (£500 for 40% tax payers), it may be that, for most modest savers, that won’t be too much of an issue.

The Help to Buy ISA was, unsurprisingly, welcomed by the housing industry. Paul Beresford, CEO of independent estate agent Beresfords Group, enthused, “The Chancellor is dangling a very juicy carrot to first time buyer voters, in the form of the first ever Help to Buy ISA, which will significantly help those trying to save in a climate of low interest rates and high deposits.” While Paul Smith, CEO of haart estate agency, remarked: “A 25% top-up for the average first time home deposit is a fantastic incentive to start saving and see the tangible results.”

Among financial experts the response was more muted. Rupert Swetman, head of mortgages at Which? Mortgage Advisers, said, “First time buyers struggling to build up a deposit will welcome the new Help to Buy ISA, as it rewards regular monthly saving. While it’s difficult to predict whether this will deliver value for consumers in the long-term, it’s likely to be most attractive to couples, parents looking to help their children and those looking to buy outside of London, in areas where property prices and the market aren’t growing so steeply.” Peter Williams, executive director of the Intermediary Mortgage Lenders Association, was underwhelmed. “Tax cuts for first time buyers [the 25% top-up effectively negates basic rate tax] will help to tip the scales in their favour, but they can only do so much without more fundamental changes to housing supply and market structures. The Help to Buy ISA will help some households, but we must guard against a situation where house prices rise faster than savings – the fate suffered by previous interventions in this area.”

Stephen Hemmings, corporate tax director at accountancy firm Menzies, is actually concerned that the scheme could make things worse. “The underlying problem in the market is a chronic lack of housing stock. A cynic would argue that by giving first time buyers more funds to invest, without increasing the amount of housing stock, you will only contribute to a further increase in house prices, which will not help first time buyers at all.”

If the smiles are beginning to fade slightly, then the law of unintended consequences may be about to make things even worse. First time buyers may well have gone to put the kettle on in celebration, after the announcement of the Help to Buy ISA, and missed the seemingly boring stuff about pensioners being able to cash in their annuities and access their pension pots. Unfortunately this is all too relevant.

According to Neil Lovatt, director at Scottish Friendly, “The baby-boomer generation has always had an unhealthy obsession with property. This has been manageable, even being beneficial to the economy when people slowly climbed the property ladder. But the new pension rules will essentially bankroll a generation, allowing them to buy into an already over-inflated market, in the expectation that it will help fund their retirement.” In other words, vast numbers of pensioners might decide they want their money to be as safe as houses and reinvest their pension pots into buying-to-let the modest properties favoured by first time buyers, pushing prices up yet further.

The issue of housing supply wasn’t completely ignored in the Budget. The Chancellor pledged to spend £1m a year on a new London Land Commission that will help to develop brownfield sites in the capital, and he identified 20 new Housing Zones across the country that will share a £200m loan funding pot, to deliver 45,000 new homes on brownfield sites. In addition, he pledged his support to new garden cities to be built in Basingstoke and north Northants. Of course, all of this, and indeed the flagship Help to Buy ISA itself, will depend on the priorities of the new Government now settling into power.

 

Help to Buy ISA in detail

  • The Government will top up savings by £50 for every £200 saved each month, up to a maximum of £3,000. The minimum payout is £400, meaning you must save at least £1,600 to qualify
  • The new ISA will be available in the autumn, but anyone who has already invested in a new or existing cash ISA in this financial year will have to wait until April 2016 before they can open one
  • As well as the Government bonus, the banks and building societies offering the ISA will also pay tax-free interest, so shop around to find the best offer
  • The product is available to anyone aged 16 and over who has never owned a home, and couples or groups buying together can have an account each
  • You can put in an initial deposit of up to £1,000, then up to £200 can be saved each month. You don’t have to put in something every month, but you can’t ‘roll-over’ the £200 allowance into the next month and pay in £400 then – if you miss it, it’s gone
  • Withdrawal rules will vary from provider to provider, but the bonus is only payable on the amount actually in the account (including any interest paid) at the point a property is purchased
  • The accounts will be available to open for four years, but once opened, first time buyers have as long as they like to make their purchase (although be wary of changes of Government)
  • You’ll be able to transfer from one provider to another whenever you like, in order to get the best interest rate, following normal ISA transfer rules
  • The bonus is paid directly to your mortgage lender when a house is actually purchased, it never goes into your account so doesn’t earn any interest
  • The scheme can be used in conjunction with other Help to Buy schemes, and can be used to buy homes up to £450,000 in London and £250,000 elsewhere in the UK. The saver must be planning to live in the home, it is not available for buy-to-let purposes
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