Three kinds of help-to-buy
First-time buyers have had it tough – but there is light at the end of the tunnel. Help-to-buy ISAs are here, along with a new London-based scheme… and there’s yet another source of help for those who search for it.
Ever feel like the property ladder has risen so far out of reach that you’d need another ladder just to get on it? Well, the government has finally noticed – and has duly delivered a couple of ladders. If you’re eligible, they could be enough to set you on the road to home ownership.
Ladder number 1: the Help-to-Buy ISA
Available from 1 December 2015, the Help-to-Buy ISA is designed to help you save up a large enough deposit to secure a mortgage.
How it works: You open your ISA with an initial lump sum of up to £1,000, and can then save up to £200 per month (so in the first month you can deposit £1,200 in total). You can miss monthly deposits but you can’t roll them over, so the maximum you can pay in is always £200. You can save up to £12,000 in total (deposits plus interest) and when you use the ISA to complete the purchase of your first home, the government adds a bonus of 25 per cent (so a £12,000 ISA is boosted to £15,000). If you choose not to buy a home you can still take the money, but you won’t get the 25 per cent bonus. You’ll need to save at least £1,600 to qualify for a 25 per cent bonus (meaning you’d withdraw £2,000 in total).
A couple who buy a home together, each using a maximum Help-to-Buy ISA, would have their £24,000 of savings boosted to £30,000 – that’s £6,000 of free money.
Tip: Even if you save up at the fastest rate of £200 a month, it will take you just over four and a half years to save the maximum amount of £12,000, so make sure you plan a long way ahead.
Tip: Not all banks will provide this ISA and some will offer less interest than others, so do shop around for the best deal.
Please note: You will only receive the 25 per cent top-up after your home purchase has completed. This means (unfortunately) that you will need to source the additional money for the house purchase from somewhere else. For instance, you could borrow the money from your parents on the basis that you will be able to repay it very soon from your ISA bonus.
Ladder number 2: London Help-to-Buy
This one applies only to properties in the capital, but anyone in the UK is eligible for the scheme so long as they are buying their first home and the property is in any of the London Boroughs or the City of London. It means that first-time buyers won’t need such a big deposit and can also take out a lower mortgage.
How it works: The scheme applies to new homes in London worth up to £600,000. First-time buyers of any age can buy a home with a deposit as low as 5 per cent, and can borrow up to 40 per cent of the property’s value as an initially interest-free loan from the government. You’ll still need a mortgage for the rest of the cost (which must be for at least 25 per cent of the property’s value, but won’t be more than 55 per cent).
The government loan is interest-free for the first five years, after which you will pay 1.75 per cent annual interest plus 1 per cent over the Retail Price Index, so it will remain a very attractive rate. The loan must be repaid in full after 25 years or when you sell your home. You apply for it via your mortgage lender, who also administers it, so there’s not a lot of extra hassle.
Tip: Remember you don’t have to live in London already to benefit from this scheme. Any UK resident is eligible.
And one more ladder…
Using either or both of these Help-to-Buy schemes could bring you at last within reach of owning your first home. As a final boost to your chances, it may be worth seeking independent advice from an IFA or independent mortgage adviser, who can find you the very best mortgage deals from the whole of the market. In addition, an IFA can be particularly helpful if you’re raising money from another source. For instance, if you hope to get some of the deposit from your parents, then your IFA can enable them to find the most effective way to help without overstretching themselves or taking unnecessary risks.
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