How to become a help-to-buy ISA expert

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It's no longer possible to open a Help to Buy ISA - the final day was 30 November 2019. If you opened your Help to Buy ISA before then you can keep saving into your account and this article will help explain how it all works. If you're looking for another option to boost your savings, think about the Lifetime ISA.

The Help-to-Buy ISA was launched in December 2015 and is designed to help first-time buyers get on the property ladder. The ISA is trying to close the gap between low-paying saving products and increasing house prices. The last day to open a Help to Buy ISA was 30 November 2019.

In a nutshell:

  • Encourages new homeowners to save for a deposit,
  • Government add a 25% bonus to the amount you save,
  • For every £1,000 you save the government will add £250, up to a maximum of £3,000.

The Help-to-Buy ISA works in addition to the Help-to-Buy equity loan scheme where you can get a loan worth up to 20% of the value of a new-build home to increase a buyer's deposit, which is then repayable when the home is sold.

How much can you save a month?

You can save up to £200 a month into a Help-to-Buy ISA, but in the first month you can deposit up to £1,200 to get things started.

The minimum government bonus is £400, so to receive this you must save at least £1,600. The maximum bonus is £3,000 and to receive that amount you must save £12,000 into your Help-to-Buy ISA.

The £200 monthly deposit limit means it would take over four years to reach the maximum level of savings to get the maximum bonus.

In addition to the government bonus, you'll also receive interest like you would with a normal ISA. The rate will depend on your chosen provider but will be similar to rates offered on cash ISAs. You don't receive interest on the bonus because you don't get the bonus until you buy the property.

Are there any restrictions?

  • You must be a first-time buyer and intending to use the savings towards a deposit for your first home.

  • You must be planning to buy your home with a mortgage, the scheme is not available for cash-buyers.

  • You can use the money as a deposit towards any type of mortgage, including a Help-to-Buy mortgage, shared ownership and self-build but not buy-to-let.

  • You don't need to get a mortgage with the same provider you opt for when choosing which Help-to-Buy ISA provider to use.

  • You must be 16 years old, the account cannot be opened by someone else on your behalf.

  • You can't open a Help-to-Buy ISA and a cash ISA in the same tax year.

  • You can open an account up until 30 November 2019. After that date the scheme won't be available to new savers. If you open an account before then you can continue saving into it until 30 November 2029. You must claim your bonus by 1 December 2030.

  • The bonus can be used on homes worth up to £250,000, or up to £450,000 in London.

When do you receive the bonus?

When you are near to buying your first home you should tell your solicitor or conveyancer to apply for your government bonus.

Once they receive the bonus it can be added to the funds that you are putting towards the purchase. The bonus must be part of the money used to complete the property transaction and can't be used to pay for estate agent fees, legal costs, or any other indirect costs linked to buying the property.

How to increase returns and maximise the yield

Savers can get better returns using the scheme than from traditional savings accounts. As with any financial product, shop around to find the best available returns. Currently the top-paying Help-to-Buy ISA pays 2.53% interest.

Even if you don't want to lock your money away for years, or you are close to reaching your savings target for a deposit on a new home, it could still be worth utilising the scheme for a short time to pick up the minimum bonus of £400.

If house prices are rising

If house prices are rising then it might make more sense to buy sooner rather than later, because the bonus benefits could be outweighed by the rise in house prices over the time you waited.

If house prices are falling or sitting still

If house prices are stagnant or falling then it makes sense to utilise the full four year term to maximise the government bonus you'll earn.

If you already have a deposit, you can add to it

If you already have your deposit saved, you could pay the higher initial deposit of £1,200 that is allowed in the first month and then two contributions of £200 in the next two calendar months to reach the minimum investment level which entitles you to the £400 bonus. This strategy only takes a few months to complete and gets you the minimum bonus.

If you already have savings

If you already have savings, you can gradually invest your existing savings up to the monthly limit.

With any remaining savings you have left after reaching the Help-to-Buy contribution limit, you can invest them into savings bonds. When they start earning a return, you can drip-feed them into the Help-to-Buy ISA. That way they'll be earning the best rate of interest while you wait.

With current savings rates for one, two, and three-year savings bonds at a two-year high, it's a good option and you can earn more interest than you can get from traditional savings accounts.

Everyone can now earn £1,000 in savings interest each year before tax is due, so most people won't have to pay tax on the interest from the savings bonds.