Help-to-Buy ISA’s

Help-to-Buy ISA’s a boost for first-time buyers

Buy to Buy ISAAspiring first-time buyers could be handed up to £3,000 in a bid to help more people get onto the property ladder, thanks to George Osbourne.  The chancellor announced that the government will hand over £50 for every £200 a would-be buyer saves towards a deposit.

The new help-to-buy ISA’s means that if a first-time buyer can save £12,000 in a tax-free account, the government will add £3,000 – which could significantly reduce the length of time they would need to save to buy a home.  Anyone can open an account if they are over 16 and have never owned a home before, which means a couple buying their first home together can claim up to £6,000 towards it.  The scheme is set to launch in the autumn.

However, critics warned the new scheme could fuel demand for homes without increasing supply, and said the £2bn cost to taxpayers over the next five years could instead have been used to finance many more affordable homes.

The chancellor said the help-to-buy ISA’s combined “two of our most successful policies… to tackle two of the biggest challenges facing first-time buyers – the low interest rates when you build up your savings, and the high deposits required by the banks.”

Savers can open the help-to-buy ISA’s account with a lump-sum deposit of up to £1,000 and can add up to £200 a month.  The government will then add £50 for every £200 saved.  The minimum savings to qualify for the scheme are £1,600, but there is no minimum investment per month.

The government payment is only added if and when it is used as a deposit on a home, although savings in one of the new accounts can be accessed at any time.  The scheme can be used for deposits on properties costing up to £450,000 in London and up to £250,000 elsewhere in the UK – which accounts for more than 90% of first-time buyer purchases.

It can also be used alongside other government policies such as the help-to-buy interest-free loan scheme or the mortgage guarantee scheme for 95% loans.  Savers can use help-to-buy ISA’s with a deposit saved elsewhere or the cash can also come from parents or other family members.

Prior to the financial crisis, first-time buyers were sometimes able to obtain mortgages of as much as 125% loan to value, and buyers with only very small deposits were able to get a loan quite easily.  The arrival of the help to buy scheme in the 2013 budget has boosted the 95% mortgage market, but high rents and rising house prices have continued to make it difficult for would be buyers to make it onto the property ladder.

Mortgage lenders and brokers said the new scheme would address some of the problems met by first-time buyers who were struggling to save, especially in areas where house prices are rising quicker than buyers can save. It offers a solution to the challenge of saving a deposit, which is sometimes the biggest obstacle first time buyers have to face, therefore making it easier for people to get onto the property ladder sooner.

The help-to-buy ISAs will be available to new account holders from the autumn.  Although they are only for 4 years, homes can be bought at any time, so a 16-year-old could open an account now to buy a property much further down the line, although the value of the £3,000 boost would erode over time.

Initially, activity could fall as first-time buyers hold back from buying a property until they can benefit from the assistance.  However, most commentators expressed concern that further down the line, demand for homes could increase, therefore pushing prices further out of the reach of would be buyers which could potentially lead to calls for more government help.

The housing charity Shelter insist the money could have been better used to provide housing, stating that the money spent on the scheme could build almost 65,000 affordable homes.

Post courtesy of The Guardian.