For most of us, buying a property will be the single biggest purchase we make in our lives. If you’re trying to save enough money for the deposit on a new home you may have wondered what a Help to Buy ISA is and how to set up a Help to Buy ISA.
While there’s no replacement for regular, consistent saving when it comes to reaching your financial goals, there are ways to boost the amount you save.
An Individual Savings Accounts (ISAs) is a government initiative that can offer tax relief on your savings, and can help you secure the keys to our new home in record time 🏡
How does a Help to Buy ISA work?
A help to buy ISA is a savings account designed to help first-time buyers save money for a mortgage deposit. Help to Buy ISA savings are tax-free and this government scheme allows you to claim a bonus on your savings once you buy your first home.
It’s worth mentioning here that Help to Buy ISAs are no longer available for new applicants. However, if you already have a Help to Buy ISA, you can keep on saving money into your account until November 2029 and earn a government bonus on your first home purchase by 1 December 2030.
Not everyone is eligible for the Help to Buy government scheme. To qualify for a Help to Buy ISA account and be able to claim the government bonus, you’ll need to:
- Be over 16 years old
- Be a first-time buyer (you can’t open a Help to Buy ISA account unless you’re looking to use your savings in this account for your first home purchase)
- Buy a home costing a maximum of £250,000 in the UK or £450,000 in London
How much can I pay into my Help to Buy ISA Account?
The maximum amount of savings you can generally contribute to your Help to Buy ISA account is £12,000 in total, with a maximum government top-up of 25%.
Although the total amount you can save into a Help to Buy ISA is £12,000, there is no option to make a lump sum payment for this amount, with a maximum monthly contribution normally capped at £200 (the government bonus of 25% is then added to this amount) .
When you first open your Help to Buy ISA you may deposit £1,000 on top of your regular monthly payment of £200, but your annual contribution is typically limited to £2,400 (with the government bonus bringing this to £3,00) due to the monthly capping.
When can I claim the government bonus?
Help to Buy ISAs are a type of saving accounts designed for a very specific goal, that of buying your first home. This means that a Help to Buy ISA account holder won’t be able to claim the government bonus before completing the actual home purchase (but after the exchange of contracts has taken place).
It’s worth noting that you’ll need to claim your bonus through your solicitor or conveyancer.
Furthermore, apart from requiring you to use the money towards the purchase of your new home, your savings will also need to first reach a minimum of £1,600 to be able to claim the government bonus.
Simply put, to qualify for the bonus, you’ll have to make a contribution of £1,600 into your savings account and use this once the property purchase has been completed.
What are the interest rates for a Help to Buy ISA savings account?
As Help to Buy ISAs are considered to be savings accounts you can earn interest on your savings but each provider sets its own interest rates to encourage competition in the market.
Nonetheless, the interest rate will only apply to your Help to Buy ISA savings and not on the government bonus you’ll earn in the end, as you won’t be able to use the money before buying your new home.
With this in mind, it’s natural to wonder whether you’ll be able to switch between different Help to Buy ISA providers in case you identify a better (interest-rate) deal in the future. Fortunately, Help to Buy ISA account holders can switch between different providers, provided the recipient ISA provider accepts the transfer.
Is Help to Buy ISA right for me?
While a Help to Buy ISA can offer many benefits, it certainly has a few disadvantages which are worth considering before opening such an account.
In particular, while the 25% government boost is higher than the interest you’d earn with a Cash ISA for instance, the maximum allowance of £2,400 yearly savings is much lower than the latter (£20,000 for 20/21)
Also, as lump-sum payments are not permitted after you first open your Help to Buy ISA account, if one month you’re unable to contribute to your savings, you won’t have the chance to compensate for the missed contribution in the coming months.
It’s also worth noting that Help to Buy ISAs are no longer available for new savers. Hence, if you didn’t open an account in time, you’ll need to consider another type of ISA. For example,a Lifetime ISA offers very similar services with similar objectives.
Lifetime ISA vs Help to Buy ISA
Lifetime ISAs and Help to Buy ISAs are both government initiatives which help you save for and reach very specific financial goals. Both of them offer a 25% government bonus that’s applied to your savings and both can be used to buy a new property.
One of the main differences between them is the fact that Lifetime ISAs can also be used to fund the cost of retirement.
You can keep saving into your Lifetime ISA account until you are 50 years old, and you can withdraw any money saved along with the 25% top-up bonus only after you turn 60. Yet, if you decide you want to withdraw your money early or for reasons other than your property purchase, withdrawal charges will apply.
There is usually a 25% charge on the amount withdrawn, but due to the recent coronavirus outbreak, the government has reduced this amount to 20% until the 5th of April 2021.
When compared to a Help to Buy ISA, from which you can withdraw money without any penalties applying once you reach £1,600 in savings, the Lifetime ISA may be considered a less flexible option.
However, if you’re a first-time buyer aged between 18-39, and you won’t need to withdraw money from your Lifetime ISA account before you’re 60 or for reasons other than retirement, then a Lifetime ISA could be a good option for you
Can I have a Lifetime ISA and a Help to Buy ISA?
Yep. But you’d only be able to earn the government bonus from one of them towards your property purchase.
Another thing to consider is that if you transfer money from a Lifetime ISA to a Help to Buy ISA, or vice versa, the transferred amount will count towards your yearly contribution allowance.
So, if you were to transfer £2,000 into your Lifetime ISA account, you’d then be allowed to save a maximum amount of £2,000 in that year.
If you already own an ISA account and wish to transfer your current savings into an ISA account with Plum, you can contact our customer support team, either by tapping 'help' in the app or by emailing (email@example.com) for the ISA transfer form.
Plum offers a Stocks & Shares ISA account which allows you to invest in a wide range of mutual funds a maximum investment allowance of 20,000 per tax year.
Kindly remember that your capital is at risk when you choose to invest.
You can find out more about Plum on our website.
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