Frankie asks: “I was wondering what your thoughts were on the new help to buy ISA. Is a time limit to use the grant? What happens if I don’t put in £250 every month? What do I need to be careful of when considering this?”

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Q&A 51 – Should I Get A Help To Buy ISA? – Shownotes

Today’s question comes from Frankie:

I was wondering what your thoughts were on the new help to buy ISA. I’m 23 with approximately £10k saved, currently sitting in a current account earning very little interest.

I need some access to this money in case my car goes wrong etc. But, my plan is to transfer this £10k slowly at £250 a month for 3 years.

Does anyone know if there is a time limit to use the grant?

Some things have said that I would need a mortgage offer already, is that location dependent?

What happens if I don’t put in 250 (I think that’s the sum) every month?

What happens if I meet someone who I decide to buy a house with?

Is there any disadvantages of just using it as a saving account if I don’t get a mortgage at the end of it?

What do I need to be careful of when considering this?

 

 

Your Emergency Fund

Lots of questions there Frankie, so let’s address each one-by-one.

You said that you have £10k saved in a current account earning very little. If you are planning to buy a house in the next few years, then a Help-to-Buy ISA will be a good idea for you. However, before you do that, you need to look at your overall returns on this money.

You are right that you should be keeping some aside for an emergency (maybe 3-6 months’ of expenses). However, if you meet the criteria, you could be earning up to 5% on some of that cash by selecting the best current account, or 3% on the whole amount using the Santander 123 current account.

 

 

Help To Buy ISA Deposit Limits 

You also say in your question that you then intend to move £250 a month into the Help To Buy ISA. Unfortunately this isn’t possible. The rules on the HTB ISA is that you can deposit £1000 in the first month as an initial deposit, and then up to £200 in that month and every following month. Then, for any amount in the account, you will earn a certain % depending on the HTB ISA you choose, AND 25% matching from the government as long as you use that money to buy your first home.

Any amount that you deposit over this will not be matched by the government and hence you lose the main benefit of the scheme.

The % return on the ISA cash is set by the ISA provider and they are very competitive right now with banks trying desperately to pick up new customers through the scheme. At the time of recording, most offer around 2-2.5%, but Virgin Money is 3% and Halifax leads the way with 4% interest on the balance on top of the governments’ 25%.

So, to answer your individual questions, is there a time limit? There isn’t, but there is effectively a total amount limit. The government will only match 25% up to a total of £12,000. Based on putting in £1,000 upfront and then £200 every month, that would take almost 4 years to achieve.

Then, the money can sit in the account for as long as you wish until you are ready to buy your first property. The scheme is scheduled to end in December 2030, but that won’t be a problem for most people starting to save today…I hope!

You also ask “What happens if I don’t put in 250 (I think that’s the sum) every month?”. As I said before, it’s £200 each month, but if you don’t deposit that no problem. You’ll earn the 25% bonus on what you do deposit up to the £200 limit.

 

“What happens if you meet someone who you decide to buy a house with?” 

Both partners can separately save in their own HTB ISA account and can both benefit up to the aforementioned limits each. There is a maximum property price of £250k or £450k in London and that is the total of the property, independent of whether you buy alone or with someone else who is also using the Help To Buy ISA scheme.

 

“Is there any disadvantages of just using it as a saving account if I don’t get a mortgage at the end of it?”

Great question. Not that I can see. If you are going to buy a house with the cash, brilliant. The government gives you 25% for doing so. However, if you don’t and you just want to take the cash out, you won’t get the governments’ 25%, but you will still get the interest from the account provider (i.e. the 4% from Halifax).

 

“What do I need to be careful of when considering this?”

The only other catch worth mentioning is that you can’t contribute to a Cash ISA and a HTB ISA in the same year. This probably won’t effect you given your question, but is something for most people to keep in mind.

 

Help To Buy ISAs: A Conclusion

As a conclusion, the scheme is pretty awesome in my opinion. Say you qualify and you are looking to buy in one years’ time.

You can put in £1000 now and 12 months of £200. That totals £3400. The government will offer a bonus of 25% if you use that for a house purchase, which is £850. You would also have earned interest of approximately £85 in the HTB ISA account. Also, if you had the original £3400 in the current account earning 3%, you’d also have another £30 or so in interest there.

Hence, in one year, your return is £965 against your investment of £3400 which is an annual return on investment of 28%. You’re not getting that anywhere else as a fixed return. Not legally anyway!

I hope that information helps Frankie and feel free to get back in touch if you have any other questions. Of course, that applies to all our listeners and readers. See you back here on Monday when we have a pretty complicated question on splitting equity for friends buying a house together.

 

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