Don't panic! Your Help to Buy Isa is not useless
You might have seen an article over the weekend, saying half a million people won’t be able to use the bonus from the Help to Buy Isa to pay for the deposit on a house.
If you fear your hopes of first-time home ownership have been dashed, don’t freak out and pull your money out of your Isa before reading this.
Do so and you could walk away from a savings account paying 4% interest that won’t be paid on a lump sum practically anywhere else, though you might get better short-term rates on monthly deposits in a regular savings account, admittedly.
If you’re considering opening a Help to Buy Isa now, accounts paying 4% are no longer available (only existing customers will benefit from them), but Help to Buy Isas still offer decent rates of up to 2.5%. Some people will get better rates still, if they are eligible to save with a handful of regional building societies.
There’s also the 25% bonus, of up to £3,000, paid by the government when you complete your property purchase. Some recent reports have suggested this bonus is useless. It’s not.
So what’s all the fuss about?
On top of market busting interest rates, Help to Buy Isas pay a bonus that goes towards your first step onto the property ladder, helping you to seal the deal on your first home.
- See our Help to Buy Isa guide for more information on how the scheme works.
Over the weekend, some reports hinted, and one or two explicitly stated that the bonus can’t be used towards a deposit for a first home. It can.
The deposits referred to in these reports are in fact completely unrelated to the mortgage deposits we usually think of as house deposits.
Known as exchange deposits, the subject of these reports is a deposit taken by the seller when exchanging contracts to stop the buyer from backing out. These are included in the total transaction price, so any money paid towards an exchange deposit will be deducted from the final bill when the transaction completes.
The Help to Buy bonus won’t help you with your exchange deposit, though you can use the rest of the money in your Help to Buy Isa – the money you've saved into the account - for this.
Instead, the Help to Buy bonus will boost your buying power on completion, and mortgage lenders will treat this as part of your deposit when working out the maximum amount they are willing to lend to you.
It’s best to tell your solicitor first thing that you’ve got a Help to Buy Isa to avoid complications slowing things down later on.
While the seller might ask for 10% of the property’s value as a guarantee you’ll buy, it’s in their interest to be flexible. They won’t lose any money that’s whittled off the exchange deposit, they’ll just get it slightly later when the deal completes.
So when do you get the bonus?
Your Help to Buy bonus gets paid to the seller on completion of the mortgage, and your bank or building society will include that when it works out your up-front stake.
There are two main numbers that determine how much a bank will lend to you:
- Your loan-to-income ratio - the size of the loan in years you’d need to pay off the mortgage if you used all of your salary and paid no interest.
- And the loan-to-value (LTV) ratio - the proportion of the property’s value they’re willing to lend for you to buy it.
As the lender includes the Help to Buy Isa bonus in your stake, each £1,000 will have a much bigger impact on the amount the bank will be able to lend you. At 90% loan to value, the bank could increase your maximum mortgage by £9 for each £1 in your Help to Buy Isa bonus. Even at 75% LTV your potential buying power grows by £4 for each £1 from your bonus.
Who’s used the scheme so far?
As of June 2016, over 2,000 people have bought through the Help to Buy Isa scheme since its launch in December 2015.
And it doesn’t look like it’s only helping wealthy buyers at the top of the market who don’t need it. Most purchases have been for properties under £200,000, and 42% of purchases were under £150,000.
What the press reports over the weekend do highlight is that buying a house isn’t as simple as saving up your deposit, getting a mortgage and moving in. It’s a drawn out process, and you’ll be charged different fees by different people along the way. There’s a decent article from the Money Advice Service showing you what to expect here.
The bonus from your Help to Buy Isa(s) gets paid to the seller at stage 6.