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Following on from Lauren’s budget blog, I decided to look at the new Help to Buy ISA scheme, due to start/open on 1st December 2015. This scheme will help first time buyers like myself who are desperate to get onto the property ladder but are finding it difficult in the current climate where house prices are soaring and therefore big deposits are required.

isa houseSo, how does it work? For first time buyers above the age of 16, the government will add 25% to everything you save in your ISA. You are able to save up to £200 a month meaning the government will add a bonus of £50 each month. Initially, you are also able to save an additional £1,000 on opening the ISA and therefore receive a total bonus of £300 in the first month bringing your first month savings to £1,500. In total, you are able to save £12,000 with the Help to Buy ISA scheme. This means the government will add a total bonus of £3,000 taking your total savings to £15,000!!

Even though the amount you are able to save each month is capped at £200, if you are a basic rate taxpayer, from 2016, you are able to earn tax-free interest on savings up to £1,000 in a typical savings account (£500 for higher rate taxpayers). So, if you did want to save more than £200 a month, it may be worth thinking about opening a normal savings account alongside a Help to Buy ISA.

As like all ISAs, you are able to receive tax-free interest on your savings. Bonuses are also tax free however, you will not be able to receive interest on them. There is no limit to how long your ISA can remain open however, the scheme is expected to last 4 years meaning you can only open an ISA between 1st December 2015 and 1st December 2019. An added advantage is that the ISA applies to each first time buyer and not each house, therefore, if you are saving for a deposit as a couple, each of you are able to open a Help to Buy ISA meaning you can save up to £24,000 in four and a half years with an extra £6,000 in bonuses!! Over these four and a half years, you are able to switch between Help to Buy ISA providers as interest rates change however, please be careful and make sure you are transferring your savings and not withdrawing them. If this is done, you will be unable to reopen a Help to Buy ISA as you are only eligible for one in their lifetime. On top of this, you are not tied in to taking out your mortgage with your ISA provider. Barclays, Halifax, Lloyds Banking Group, Nationwide, NatWest, Santander and Virgin Money have confirmed they will offer the savings product. HSBC and TSB are yet to confirm whether they shall be participating.

As with all ISAs, there are also some rules to be followed. Firstly, you must bear in mind that you can only use this scheme for houses worth up to £250,000 (and £450,000 in London) and they cannot be used on overseas property. Secondly, you are ineligible for this scheme if you are planning to rent out your property. Lastly, you need to save £1,600 in order to qualify for the bonuses. Once you have reached this point, you are able to withdraw your savings at any time and receive your bonus. Your bonus will not be received into the bank. It is calculated once you have stated that you wish to withdraw your savings and is sent straight to your mortgage lender.

Please note, you are only able to have one ISA open in each tax year. This means you will have to wait until the next tax year (6th April 2016) in order to open a Help to Buy ISA if you currently have one. Although you can save a lot less over the year with the Help to Buy ISA compared to a normal cash ISA (£2,400 plus your initial deposit in comparison to £15,240 with a cash ISA), the 25% bonus is much higher than any interest you will earn with the cash ISA.

Maximum contribution Running total
Initial deposit £1,000 £1,000
Year 1 £2,400 (£200/month) £3,400 + interest
Year 2 £2,400 (£200/month) £5,800 + interest
Year 3 £2,400 (£200/month) £8,200 + interest
Year 4 £2,400 (£200/month) £10,600 + interest
Year 5 £200/month until you reach £12,000 £12,000
Governent bonus £3,000 £15,000
Grand Total £15,000