The Government’s new Help To Buy ISAs launched quietly in December, offering a seemingly generous bonus of 25% of the deposit saved by first time buyers.
These special Individual Savings Accounts offer a 25% bonus up to £3,000 which is paid on purchase of a property under £250,000 (or £450,000 in London). As the account limits are personal, that could equate to an additional £6,000 for a couple who have saved at least £24,000 between them.
Most of the major banks and building societies have opened the ISAs to savers, satisfying the government’s promise of a contribution towards First Time Buyers’ deposits. The ISAs form part of Chancellor George Osborne’s strategy to combat the housing crisis.
Given the size of the end bonus for the Helps To Buy ISAs, the interest rates on the accounts may appear less important and yield little reward annually. Nonetheless, it is worth considering rates if only to help the speed at which you can reach your target deposit size. The participating banks and building societies have launched a range of accounts with varying features and benefits: Bank of Scotland, Lloyds, HSBC, Nationwide, Natwest and Santander all offer an interest rate of 2% a year, Virgin is offering 3% and the Halifax 4% if you meet certain criteria. Because the accounts are ISAs, the interest received is also exempt from income tax.
The average age of First time Buyers reached 37 in 2015, highlighting the reality of raising a large enough deposit over time. However, saving a cash deposit may continue to be impractical, given the rapidly rising house prices. Using these Help to Buy ISAs, savers can each put away £1,200 in the first month then £200 monthly after that towards their goal. A total of £3,400 per person in the first year and £2,400 per person in each subsequent year means that it would take just over 4.5 years to reach a combined total of £24,000 and claim the £6,000 bonus.
According to Halifax, House prices rose by 9.5% last year. At that rate, after 4.5 years, a £250,000 property could have increased to more than £370,000. Whilst past price increases are no guarantee of future market fluctuations, they do serve to illustrate how difficult it is for deposit savers to keep up with house prices.
Despite the government’s renaming of building projects and these cash bonuses for savers, the only real solution to the housing crisis is to build more homes to increase the supply side. However, for some first time buyers, these savings plans could offer a few thousand extra pounds and make their dream of home ownership a reality 25% earlier.
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