Kickstart your savings with a Help-to-Buy Isa

Help to Buy Isas have only been available since 1 December 2015, but the appetite for them has been strong, with HM Treasury reporting that more than 500,000 accounts have opened since launch. And it’s not hard to see why people are flocking to this kind of Isa: it offers a generous 25 per cent cash boost from the government which means that for every £200 saved by an individual, the government will hand over £50.

The maximum amount that can be saved in any one month is £200, but to kickstart your account, in your first month you can also deposit a lump sum of up to £1,000, so contribute £1,200 in total. The overall maximum amount the government will contribute is £3,000, which means a total of £12,000 needs to be saved in the Isa to receive this amount. The minimum government bonus is £400, meaning that you need to have saved at least £1,600 into your Help to Buy Isa before you can claim your bonus.

You only receive the bonus once you purchase a property, and therefore the amount you get depends on how much you have saved at the point of the property purchase. When you are close to buying your first home, you will need to instruct your solicitor or conveyancer to apply for your government bonus. Once they receive the government bonus, it will be added to the money you are putting towards your first home. If you don’t buy a home you won’t get the government bonus.

The money placed in a Help to Buy Isa can be used by first-time buyers aged over 16 to help buy a home with a purchase value of up to £250,000, or £450,000 for properties in London.

Gary Smith, financial planner at Tilney Bestinvest, says Help to Buy Isas are a good vehicle for parents and grandparents wanting to help their children or grandchildren get on the property ladder because of the restricted access they impose.

“A lot of parents and grandparents are reluctant to make outright gifts to their children or grandchildren because once you’ve done that they can effectively do whatever they like with the money, and not necessarily use it as a deposit for a house,” he says. “But with the Help to Buy Isa that money can only be used towards a deposit for a house.”

For those looking to buy a property in the next two or three years, this may be a particularly good time to fund a Help to Buy Isa, before transferring it into the forthcoming Lifetime Isa (Lisa). “Given the current uncertainty, there is potential for house prices to fall,” says Mr Smith. “There’s no evidence to that effect yet but the Governor of the Bank of England has intimated that may be an issue. And if you’re getting an uplift on your deposit through a government contribution and you’re able to save quite a bit through Lisa, which has a higher allowance, that deposit – as a percentage of a falling property price – is a bigger deposit, which means you might qualify for another type of mortgage with a lower rate.”

He adds that recent action by the Bank of England to force banks to reduce their capital requirements and encourage more lending to consumers should prove helpful to first-time buyers.

Another reason why it makes good financial sense to fund a Help to Buy Isa is the higher saving rates on offer, says Danny Cox, a chartered financial planner at Hargreaves Lansdown, as the rates offered on Help to Buy Isas tend to be better than those offered on easy-access cash Isas.

Examples of best instant access Isa rates

Help to buy Isa

Source: Moneyfacts.co.uk as at 11 July 2016

*Annual equivalent rate

Instant access cash Isa**

Source: Moneyfacts.co.uk as at 11 July 2016

*Annual equivalent rate

**Based on an initial lump sum of £1000

“The banks view the Help to Buy Isa as a way of attracting new customers by offering a higher rate of return,” he explains. “They also see it as catering for people who are eventually going to buy a house, who they hope they can then advise on the mortgage, and sell a mortgage to as well.”

He adds that consumers can take advantage of a provider’s Help to Buy Isa rates even if they subsequently choose to opt for a mortgage with a different provider, or decide not to buy a property after all.

“For the time being, the Help to Buy Isa is a no-brainer for those saving towards their first home, even if, ultimately, their savings are used for a different purpose,” explains Mr Cox. “However, from April 2017, the Lifetime Isa will become the savings scheme of choice.”

Short-term savers

If you are building up a deposit for a house and need it in the next 12 to 36 months, investing it in the market is probably not a good idea because over such a short time period falls in value could reduce the sum and your ability to buy a house. “You’ve really got to keep it in cash – a bank account that's bearing a good rate of interest but enables instant access is an option," says Mr Smith. "Then there are premium bonds which offer tax free growth, are fully backed by the government [as is the case with all National Savings & Investments products] and offer the potential to win a million pounds and other tax free prizes."

You could also put your money into a cash Isa. Although these do not pay attractive levels of interest over short time periods inflation erosion will not be as detrimental, and will be far less damaging to your savings than a steep market fall.

But if you have four years or more, then you should consider investing in higher-risk but potentially higher-return assets, as you can ride out short-term volatility. “If you’re going to fund your savings pot with monthly payments that would warrant investing because you could benefit from pound cost averaging, as you buy units at different prices each month,” adds Mr Smith.

If you invest a set amount each month when markets fall you buy more units for your money, and when they are expensive you buy less of them.