Published on 9th December 2016
As the bells ring out the old year and ring in the new, they will also be ringing out the Help to Buy guarantee scheme and ringing in the Help to Buy ISA and Lifetime ISA. More accurately the Help to Buy scheme is due to come to a close at the end of this year and at this point it can probably be assumed that if the government had intended to extend it, it would have announced its intentions by now. The Help to Buy ISA is already in place and accounts can be opened until 30th November 2019. Accounts will be able to accept contributions until 2029. The Lifetime ISA is due to roll out in April 2017 and to continue indefinitely.
The original Help to Buy scheme is actually two schemes. There is the Help to Buy equity loan and the Help to Buy mortgage guarantee. The equity loan is only available on new builds and buyers required a (minimum) 5% deposit. The government then lends up to 20% of the remaining purchase price (40% in London) and the buyer takes out a mortgage for the rest. The mortgage guarantee scheme is exactly that. Supporters of the schemes argue that they provided essential support for first-time buyers and those on lower incomes. Opponents argue that they simply encourage house price inflation. Likewise now the scheme is coming to a close the Bank of England has stated that it believes the Guarantee scheme is no longer necessary, while the Intermediary Mortgage Lenders Association has stated the exact opposite. Only time will show who is right.
The Help to Buy ISA essentially allows first-time buyers of any age to save up to £12K (including interest). The government will then add a 25% bonus up to a maximum of £3K. This money must be used to purchase a house and the funds are only paid upon completion. In other words, if mortgage lenders require an upfront deposit (as is often the case), the buyer needs to find it from other funds.
The Lifetime ISA was introduced to help those aged 18 to 39 to buy a house and/or to save toward their retirement. They can be opened at any point between those ages and holders can continue to pay into the accounts until they reach the age of 50. Savers can contribute a maximum of £4K per year and will receive a 25% bonus. Hence, in principle a saver could contribute £128K and receive a bonus of £32K for a total of £160K. At this point it is unclear whether the government will allow savers to continue to make contributions after this age without the bonus (or even with the bonus).
Accounts must be held for a minimum of 12 months before any money can be withdrawn for any purpose or the bonus is lost. Any money withdrawn before the age of 60 has to be paid directly to a conveyancer or the bonus is lost. In practical terms this means that the funds can only be used for an exchange deposit rather than an up-front mortgage deposit. There is an exception for people diagnosed with a terminal illness, who can withdraw all their funds after their diagnosis. After the age of 60 the whole fund can be withdrawn, tax free.
The Help to Buy ISA can only be used to purchase property up to a value of £250K (or £450K in London), whereas the Lifetime ISA can be used to purchase property up to a value of £450K anywhere in the UK.
Your home may be repossessed if you do not keep up repayments on your mortgage
The tax efficiency of ISAs is based on current rules. The current tax situation may not be maintained. The benefit of the tax treatment depends on individual circumstances.
The value of your investments and any income from them may fall as well as rise and is not guaranteed. You may get back less than you invest.