The government has in place a few options that could help you in buying a home, below we will look at what 3 of those options mean.
1. The Help to Buy ISA
2. Lifetime ISA
3. Help to Buy equity loan
The first two options are assisted saving options, these come in the form of two ISA's (Investment Savings Accounts) that offer bonuses or incentives to help you save for a home. The third option is a government loan.
1. The Help to Buy ISA
If you’re saving to buy your first home, the government will top up your savings by 25% (up to £3,000). If you’re buying with someone else, they can also get a Help to Buy ISA.
You don’t have to pay it back. And yes that's a free £3,000 from the government if you save the £12,000 maximum. (or you could look at it as a small tax refund)
There are, as with all these things eligibility requirements:
The home you buy must:
- have a purchase price of up to £250,000 (or up to £450,000 in London)
- be the only home you own
- be where you intend to live
How it works
Your first payment to your ISA can be up to £1,200 and then you can pay up to £200 each month (setup on a simple direct debit). When you buy your property, your solicitor or conveyancer will apply for the extra 25%. (This money does not come to you it transfer directly to the solicitor/conveyancer)
How do you get it?
You can apply through most high street banks and a few investment and savings providers online. It is very easy and straight forward to do.
2. The Lifetime ISA
The recently established Lifetime ISA [LISA] can work in two instances, retirement savings, and help you buy your first home.
There is an age restriction on starting your LISA, you have to be between 18 - 40 years old.
You can save up to £4,000 in your LISA each year that the government will top up with 25% (Again this can potentially be viewed as a small tax refund) And you can do this until the age of 50. To open and continue to pay into a Lifetime ISA you must be resident in the UK, unless you’re a crown servant (for example, in the diplomatic service), their spouse or civil partner.
You can hold cash or stocks and shares in your Lifetime ISA, or have a combination of both.
There’s a 25% charge to withdraw cash or assets from a Lifetime ISA. This doesn’t apply if you’re:
- buying your first home
- aged 60 or over
- terminally ill, with less than 12 months to live
Buying your first home
You can use your savings to help you buy your first home if all the following apply:
- the property costs £450,000 or less
- you buy the property at least 12 months after you open the Lifetime ISA
- you use a conveyancer or solicitor to act for you in the purchase, the ISA provider will pay the funds directly to them
- you’re buying with a mortgage
- buying with someone else
If the person you’re buying with has a Lifetime ISA, they can use their savings and government bonus too.
They’ll pay a 25% withdrawal charge to use their Lifetime ISA savings if they own or have a legal interest in property (for example they’re a beneficiary of a trust that includes property).
If you have a Lifetime ISA and a Help to Buy ISA, you can only use the government bonus from one of them to buy your first home.
Thus if you are buying a home you have to chose which one of the two ISA's you use and transferring say the Help to Buy ISA into the LISA for retirement savings if you do not use either.
You can transfer money from a Help to Buy ISA to a Lifetime ISA. If you transfer money from a Lifetime ISA to a Help to Buy ISA you’ll have to pay the 25% withdrawal charge. (meaning I would not recomend this)
If you are eligible, it is a great idea to considering opening up the two savings options as soon as possible, even if your circumstances change, you always have that money saved up.
3. Help to Buy equity loan (New build only)
You can get a low-interest* loan towards your deposit. Called an equity loan.
The home you buy must:
- be a new build
- have a purchase price of up to £600,000 in England
- be the only one you own
- not be sub-let or rented out after you buy it (until the loan is repaid)
How it works
With an equity loan:
- you need a 5% deposit
- the government will lend you up to 20% (up to 40% in London)
- you need a mortgage of up to 75% for the rest (up to 55% in London)
- You must buy your home from a registered Help to Buy builder (See this link for a list of approved builders)
Equity loan fees
You’ll have to pay equity loan fees, but not for the first 5 years.
In the sixth year, you’ll be charged a fee of 1.75% of the loan’s value. The fee then increases every year, according to the Retail Prices Index plus 1%. (These fees can become incredibly expensive, so plan to pay the loan off as early as possible)
Your Help to Buy agent will contact you to set up these monthly fee payments. You’ll also get a statement about your loan each year.
Fees don’t count towards paying back the loan.
Paying back the loan
You must pay back the loan after 25 years or when you sell your home - whichever comes first. The amount you pay back depends on how much your home is worth (the market value).
NO MATTER WHEN YOU REPAY THIS LOAN YOU WILL PAY BACK 20% OF THE VALUE OF YOUR PROPERTY PLUS THE ANNUAL FEE ON A MONTHLY BASIS.
You can pay back part or all of your loan at any time. The smallest single repayment you can make is 10% of the market value of your home. (This means that you can not pay this off in small monthly payments, for example, you will have to save up and make larger payments of at least 10% of your property value at the time of payment)
*these fee payments do increase substantially, it is strongly advised that in the interest-free 5 years you save up as much as possible and pay this off as soon as possible.
It is always best to review all the options and choose what is best for you in your situation. Remember to always carefully check the applicable fees and limitations of the options you choose. - Rian Strauss
Disclaimer: This is not to serve as financial advice, this is to serve as some insight into the options you have available to you through the help to buy schemes, and some things to look out for.
Links to further reading: