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In the age of austerity, a government offer of “free money” to Isa savers seems not only implausible but somewhat indecent. For Haydn Horner, a 23-year-old accountant looking to get a toehold on the housing ladder, it is simply a “no-brainer”.
A first-time buyer looking for a flat in Leeds, Mr Horner plans to take advantage of a recently launched government scheme — the Help to Buy Isa— that offers first-timers a 25 per cent boost when trying to clear the considerable hurdle of saving for a deposit, plus interest, in a tax-free wrapper. He is worried about house prices, which are creeping up locally after a period of stagnation. “The market’s picking up a lot. Now’s the time to be buying,” he says.
As part of his multifarious plans to help people like Mr Horner enter the housing market, George Osborne, the chancellor, last year announced the launch of the Help to Buy Isa as a new kind of savings vehicle. The Isa variant allows savers to put away up to £200 a month towards a deposit and when they come to buy a home, the government will boost their pot by 25 per cent, up to a maximum bonus of £3,000.
The scheme is only available to first-time buyers of UK properties and can be used to help them buy homes worth up to £250,000 or, in London, £450,000. Savers need to have accumulated at least £1,600 in an account before they can claim the minimum government bonus of £400. But they can get their account going by putting in an initial lump sum of £1,200.
For those looking to maximise the government bonus, the monthly limits mean four years of saving before they can access the £3,000. But buyers who want to move quicker — perhaps because, like Mr Horner, they see prices moving away from them — can still benefit from the government offering in relatively short order.
Giles Martin, head of savings at Halifax, which is offering the Help to Buy Isa, says the lender had already seen their first customers “cash out” in January after setting up their savings account in December. “They’d been effectively quite cute in terms of maximising their initial deposit then making three maximum payments of £200 to achieve the minimum to get the £400 back.”
The lender’s 4 per cent variable interest rate on its Help to Buy Isa is the highest savings rate currently on the market. Virgin Money offers a 3 per cent variable rate, while others such as Lloyds, HSBC and Yorkshire Bank offer 2 per cent.
Anna Bowes, director at savings advice site Savings Champion, says the industry response to the initiative — with only around 15 providers — was “on the whole uninspiring”, as were the low savings rates offered by most banks.
There is an added constraint, she added, on combining the Help to Buy Isa with a cash Isa: you can only open one or the other in any tax year. If you have already opened a cash Isa and want a Help to Buy Isa in the same year, you must move the cash over to the house savings product. If the amount of cash you want to save exceeds the maximum allowed in the Help to Buy Isa, you will have to decide what else to do with it, perhaps putting it into a stocks and shares Isa or conventional savings account.
Some products, known as “hybrid” or “portfolio” Isas, offer a way out of this dilemma by allowing you to hold both a Help to Buy Isa and cash Isa within the same tax-free wrapper. Providers offering split Isas include Aldermore, Nationwide and NatWest.
Unlike the normal Isa investment regime, Help to Buy Isas may not be around forever. The government has put a deadline of November 30 2019 on opening an account, and savers must claim their bonus by December 1 2030.
But it may help to know that first-time buyers can benefit from “doubling up”, if buying together as partners or friends, since an individual, not a household, can open a Help to Buy Isa. This is Mr Horner’s plan: he can afford a deposit of about £7,500, equating to a house worth about £160,000-£170,000, as long as he goes in with a friend or co-investor stumping up the same amount. For couples willing to wait four years and save jointly, they could gain a healthy £6,000 handout from the government.
Demand for the Isa appears to be borne out by government data, with Mr Osborne announcing that 170,000 people had signed up by mid-January.
David Hollingworth, director at broker London & Country Mortgages, says the ultimate success of the scheme would probably not become apparent for several years, as it became clear whether people were able to convert their savings into a deposit. For some, house prices might remain out of reach. But for those at the margin, it could provide the stimulus to make a concerted move towards home ownership.
“It’s no quick fix but it gets people in the savings habit and the discipline of putting money away each month,” he says.
Mr Martin concurs, adding that the response to the Halifax’s launch suggested it was appealing to precisely the younger demographic intended by Mr Osborne. The bank’s average age for customers opening a normal account is between 40 and 45. That compares with 23 or 24 for the Help to Buy Isa.
“Anyone who’s financially savvy has worked out it’s a good return on investment. It’s worth being in it to get what’s effectively free money.”