Posted on 10th April 2015

How the Help-to-Buy ISA Scheme Will Work

Martin Williamson, Head of Residential Property

The struggle facing first-time buyers trying to get onto the property ladder is never far from the headlines.

But George Osbornes pre-election Budget threw another lifeline to young people who want to own their own home, with the announcement of the Help-to-Buy ISA. So, now that weve had time to digest the details, how will the scheme work?

Well, the new ISA will give first-time buyers £50 for every £200 they save as a deposit, up to a savings pot of £15,000. So, if you have saved £12,000, the Government will contribute £3,000.

Its pretty much like getting your pre-tax income to pay into the bank as the cash paid by the Government is equivalent to the basic rate a tax payer would have taken from their salary.

While existing Help-to-Buy schemes and low mortgage rates have helped many young people to buy their first home, many more are effectively locked out of the property market or have turned to the Bank of Mum and Dad.

The proportion of 25 to 34-year-olds who own their own home has dropped from 59 per cent to just 36 per cent in the last decade, according to the English Housing Survey.

So, how quickly will Help-to-Buy have any impact on the property market?

Well, whatever the result of the General Election, it seems safe to say Help-to-Buy ISAs will go ahead. Shadow Chancellor Ed Balls has already confirmed Labour would not reverse any of the measures set out in the Budget.

But, while the scheme was announced with great fanfare, it is not due to start until the autumn. And, even then, there are restrictions. It will only be available for houses with a value of up to £250,000, although that rises to £450,000 for London buyers.

It will also take time to accrue a big enough deposit. As soon as the scheme starts, you can put £1,000 into your ISA. But, after that, you can only pay in a maximum of £200 a month.

So, if a buyer is trying to save the maximum of £15,000, to put down a 10 per cent deposit on a £150,000 property, it will take them until 2021; by which time, of course, property prices are likely to have risen further. Its also impossible to predict the sort of deals mortgage companies will be offering in a few years; whether buyers will need a five, ten or 20 per cent deposit, or a sum much larger.

Help-to-Buy is, however, allocated to each persons savings, so a couple could pool their allowances, after theyve saved, for a deposit of up to £30,000.

Any effect on the housing market is likely to be long-term. Many argue the initiative could push up house prices, putting ownership out of reach even for those who save up the maximum deposit.

It is also thought it could dampen first-time buyer activity in the short-term, with the Government predicting an additional 10,000 first-time buyers, or three per cent more each year, will purchase a property from 2020 onwards.

For buyers wanting to buy a property within the next year or so, Help-to-Buy ISAs will have little impact. But for those who put in some forward planning, thinking about when they will want to buy, it could provide that extra bit of cash they need.

The Bank of Mum and Dad may well step in again, but with a little help from the Government this time. If parents encourage their child to open an ISA in their name when they start university or further education, theyll be in a good position when they start work and begin to think about making the dream of owning their first home a reality.

For further information contact Martin Williamson: 01325 341500