For first time buyers, the 2015 Help to Buy ISA was a welcome scheme. Now the scheme is set to close to new savers on 30 November 2019. We take a look at how the scheme has fared and whether it is still attractive to first time buyers.
The scheme was introduced by the Conservative government in December 2015, with an aim to encourage home ownership by helping first time buyers to get onto the property ladder. The scheme claims to allow first time buyers to buy a property three years earlier than they would have done without it. As of September 2019, the government has paid over 225,000 bonuses.
The scheme is set to close to new savers on 30 November 2019.
How Does the Scheme Work?
Under the scheme, savers pay up to £200 a month into a scheme ISA (savers can make a one-off deposit of £1,200 when they open the account).
Interest is paid on savings as with any other ISA. However, on completion of a purchase of a first home, the government will give the saver a 'bonus' of 25% of their savings (up to a maximum of £3,000). If two individuals are buying together, they can each use their own Help to Buy ISA to double the government contribution to up to £6,000.
The bonus can only be put toward a home valued at no more than £250,000 (or £450,000 in London).
Is the Scheme Still Attractive to First Time Buyers?
Although welcome to many first time buyers, the scheme isn't right for everyone, and savers should consider carefully, with the help of a financial advisor, if it is right for them. Some things to think about are included below.
Advantages of the scheme:
- Scheme savers can get interest rates of up to 2.5% on their savings. This may be more than is available in other savings accounts.
- Savers don't have to put the full £200 in each month - they can put in less if they choose. The scheme will remain open to existing savers until 2030, so lower contributors can still reach the maximum bonus over a longer period.
Drawbacks of the scheme:
- In the current housing market, the maximum bonus of £3,000 (or the maximum joint bonus of £6,000) may not make a significant difference. This is especially true of those buying in London, where the average house price is now £420,000, and a standard deposit is 15% of the purchase price.
- The maximum property value to which the bonus can be applied is relatively low, particularly for those hoping to purchase in expensive areas. If house prices continue to rise, then the cap will become more prohibitive as time passes.
- It takes a long time to save: if a first time buyer opens a help to buy ISA with £1,000 this year and then saves the maximum £200 per month, it will take until late 2023 to be eligible for the maximum £3,000 bonus.
- The bonus is only released on completion. It therefore can't be used to put towards a deposit when buyers exchange, or to pay for solicitor or agent fees.
Other Options for First Time Buyers
The scheme isn’t the only option available to first time buyers. There are many other products and initiatives to assist first time buyers. For example:
- Help to buy equity loans - The government lends up to 20% of the cost of a new build (40% in greater London) so buyers only need a 5% deposit and a 75% mortgage to buy. Those purchasing new-build homes aren't charged interest for the first 5 years .
- Shared ownership - A cross between buying and renting. The borrower will purchase between 25% and 75% of a property, and pay rent for the remaining part.
- Starter homes - A government initiative to build homes to be sold at a discount of 20% to first-time buyers between the ages of 23-40. Eligible buyers would need a combined household income of less than £90,000 in London, or £80,000 in the rest of England.
For first time buyers, there are many options available to help you get onto the housing ladder. It is always worth taking the time to explore all of the options, and to speak to a financial advisor, when planning for the future.