Help to buy ISA: Everything you need to know before the deadline.
#LetsTalkFinance
It’s been a while, but to mark my second #Let’sTalkFinance post I thought I’d bring your attention to ISA’s - specifically the help to buy scheme. Why? If you’re not aware, this scheme will be ending on the 30th November 2019 which means you have just over a month to decide if you’d like to take out a Help to Buy ISA or not!
Firstly, what is an ISA?
Essentially, an ISA is a savings account. It actually stands for Individual Savings Account but unlike a normal savings account, you get more for your buck as it is interest-free so usually has a higher interest return rate. There’s a catch though (of course), you are usually capped on how much you can deposit in per tax year (April to April). This is also known as the “ISA allowance” which is capped at £20,000 for the tax year 2019/20 and any unused allowance will not run over into the next tax year. Oh and there’s a rule: that tax-free allowance is capped for the year even if you have more than one ISA account. This means you could split your allowance over multiple ISA’s BUT they must not exceed £20,000 in total!
How many types of ISA’s are there?
There are FIVE (currently):
Cash ISA This is like a normal savings account and you can have access to your money whenever you want. If you choose to deposit money and you don’t touch it, you often receive a higher interest. With this ISA you do not have to commit to keeping it in one place. You can also get fixed rates which can give you an even better return but talk to your bank about the different options
Help to Buy ISA This was part of a government scheme that started in 2015 to help potential first-time-buyers onto the market. In the first month, you can add £1,200 and then every month after that is capped at £200. For every £200 deposited, you are given 25% on top by the government (£50) that will go towards your first home. The government bonus is capped at a total of £3,000 but still, that’s £3,000 free money. This is the ISA that will be ending at the end of November but I will get into that later.
Innovative finance ISA This usually involves peer-to-peer loans (P2P) which means that your money will be matched to people willing to lend such as businesses, property developers or individuals. This cuts out the middle man of the banks and connects you straight to the P2P lending platforms. This, therefore, means that it isn’t covered by the Financial Services Compensation Scheme (FSCS) as banks would offer and any borrowers who default on their payments may impact you. There are usually prevention schemes in place so that if this did happen, the cost wouldn’t hit you. There are also schemes such as the Lending Works Shield that will help protect investors but it’s important to know that although returns can be good, this ISA is at your own risk.
Stocks and shares ISA This is good for investing. This is where you invest funds, bonds, and shares into individual companies. These are usually managed by online brokers or platforms, a fund management group or a fund supermarket. These ISAs usually have a fee to open and there are penalties if you wish to withdraw or move your money so these are usually advised as set ISAs.
Lifetime ISA It's in the name! It’s an ISA designed for a lifetime investment which means its capped at £4,000 per year. This means you can put the remaining £16,000 ISA allowance into another ISA within the same tax year. With the Lifetime ISA, there is an additional 25% government bonus added to what you put in that tax year. You get the bonus every month and it is paid until you are 50 years old! If you opened an account at 18 and deposited £200 a month, you could gain a total of £33,000 in government bonuses by the time you’re 50!
Now that I’ve broken it down a bit, I’m going to focus specifically on the Help to Buy ISA scheme since this is the one that is coming to an end on the 30th November 2019. With a little over a month left, I thought I’d bring you all the relevant information before you decide to open an account. You may have heard some news on this and some may have told you to open an account even if you’re not sure because you can open one with as little as a pound! It all sounds fantastic on the surface but it may not be suitable for everyone. You might have seen financial expert Martin Lewis discussing it briefly on Good Morning Britain a few weeks ago but if not, don’t worry I have it all covered!
Although I’m pretty clued up with financial things I like to investigate and research myself (as you should) and even went to my bank to clarify a few things (because I care about you and want you to have the most accurate information!). In short, this scheme benefits those who plan on buying their first home in the future and it is an incentive to save since you also get the government bonus! As explained above, you can put in £1,200 in the first month but then you’re capped at only £200 a month meaning that if you wanted to put in more you can't! The bonus is for savings up to £12,000, but with a £200 cap each month, it will take a while to reach £12,000.
This means that even if you have a few thousand saved already you can’t just transfer it when you open a Help to Buy ISA so essentially you have to build it up from scratch. The other issue I had was that you are capped. If you’re like me, you'll put money away each month and this may exceed £200 deposit. By having the cap you are limited to £2,400 a year (plus the initial deposit) which doesn’t sound like a lot but I guess you could still put the rest into your normal savings account (or one with a competitive rate) so this scheme could still be beneficial as it contributes to buying a first home! The Government bonus also means that on the money you do put into the ISA, you’ll be getting a lot more than interest alone.
Although the Help To Buy ISA deadline is ending, this doesn’t mean that your account will be compromised. Once it’s open you can pay into it for years so to clarify… it’s just the deadline to open an account that is ending. This is why they are urging people to open one now to have it as an option. You can put in £1 now and decide later. The worst-case scenario is that you don’t want it, withdraw the pound (with a little interest) and close the account! There’s not really a loss here. But hold up there’s still a few things to consider…
Is the Help to Buy ISA suitable for you?
Before rushing into things (especially when making financial decisions) you need to consider all the options and figure out if this will benefit you. It may be the case that another ISA is more suitable for your needs and is better for your current situation.
Who does this benefit?
People saving for their first home before December 1st, 2030 (this is when you have to claim your bonus by).
Those that need an incentive to save but don’t have a lot of deposable income
Those struggling to get onto the property ladder
If you’re a couple trying to buy your first property, you can have a Help to Buy ISA each, meaning that you can get a total of £6000 in government bonus.
Pro’s
You can buy any property - new-build or old - as long as it’s bought by you and in the UK.
You can switch providers for free if you find competitive rates elsewhere
You can access your money however if you withdraw before buying a home, you forfeit the government bonus.
It allows individuals to get onto the property market.
You can use this with other first-time buyer schemes
Con’s
It’s only available to first-time buyers (meaning you must not have property anywhere else in the world, inherited or owned a house in the past).
The savings process is S-L-O-W since you are capped per month
You need a minimum of £1,600 to get the 25% bonus and there’s no interest paid on the government bonus
The bonus is only available as cash and cannot be turned into stocks and shares!
There is a cap on the property you can buy! The property must cost less than £250,000 for a property out of London or £450,000 in London. These caps also apply if you buy under a shared ownership scheme and the whole property value will be included, not just the share you buy. This point is extremely important to note!!
I had a few questions myself: If this scheme was so good in the first place, why is it closing? My bank didn't have a lot to say as an answer but generally, it’s one of two things. The first, that people are simply not saving and not a lot of people are taking out Help to Buy ISA’s in the first place because they aren’t ready to buy. Let’s face it, many people in their 20’s are still in student overdrafts and a considerable amount don’t have savings and have poor money management… this is why the scheme may be appealing but could explain why this scheme hasn’t been utilised as much.
Secondly, there's the issue of the cap on the property you can buy! With a cap of £450,000 in London and £250,00 for out of London, it may be hard to find a property you actually want to buy. London isn’t exactly the cheapest place on Earth so finding a property you like that is within the limit may be a little tricky. Of course, if you’re a couple you may have a better shot but I can see why people may be put off. It is important to note, however, that if you or your partner has a property/had one in the past (including inherited), you will not be eligible for this scheme. May I also add for the smart ones amongst us that you will not be eligible if you plan to buy then rent your property!
If you think you might want to buy a property over the set limit and you usually put away more than £200 a month then this might not be the scheme for you. If you want to rent, again, this may not be the scheme for you! Most providers don’t let you have a live Help to Buy ISA at the same time as a Cash ISA so this is also something to consider.
Before you consider getting the Help to Buy ISA, think if it will meet your needs. It can certainly help individuals such as couples to buy but it’s not for everyone. There is a lot of information on the internet available so the best advice I have is to do some further research (although I’ve given you all the key information you need to know). It’s worth making an appointment with your bank before the deadline to go through your options and see what rates and conditions they offer. If you’re still undecided, you could always open an account and think about it later. Opening an ISA does not impact your credit score. If you do end up getting this ISA or any other ISA mentioned above, I’d advise that you look around from time to time and switch accounts accordingly to get the most competitive rates. Not every provider offers the same conditions so check around and look at the initial payment is capped at and the rates of interest.
Finally, this is a reminder that I am by no means a financial expert and I advise you to contact your bank and looking around before making a final decision. I hope this information helps, and as always, you are more than welcome to contact me if you’d like more information or have some questions and I’ll do my best in answering or redirecting you to an appropriate source of information.
My advise would be to get a Help to Buy ISA just in case, especially if you plan to buy a property in future! It doesn’t hurt to have it as a back-up and you don’t have to use it. Sign up before the deadline.
To read the last #LetsTalkFinance post, click here.
I wish you all the best and happy saving!
Liz x