Taking the first step onto the property ladder is an exciting time but is not without its challenges. With high house prices prevailing in many areas, first time buyers will have to prepare carefully and pulling together a deposit will play a crucial role.
What is the Help to Buy ISA and how does it work?
The Government recognised that although it had targeted schemes at those with a small deposit, it could do more to help aspiring first time buyers save toward their new home.
The Help to Buy ISA allows first time buyers to save up to £200 per month plus an initial £1000 at outset. When the saver turns buyer of their first home they will receive a 25% bonus from the Government on their savings.
The maximum bonus available is £3000 which means savings of £12,000 get boosted to a total of £15,000. To be eligible for the bonus you must be a first time buyer and using a mortgage to buy a property in the UK for a purchase price of up to £250,000, or £450,000 in London.
Is it worth using the Help to Buy ISA?
There has been some criticism of the Help to Buy ISA around the clarity of how and when the bonus can be claimed. The bonus is only available when the property is purchased, in other words on completion, rather than as part of the deposit that is typically paid at exchange of contracts.
However, many purchases proceed without the need for the typical 10% deposit at exchange. It shouldn't present a problem but makes sense to be clear to your solicitor that you are using a Help to Buy ISA at outset. They should be able to help you understand how it works and detail your options.
Don't let the criticism put you off, as a 25% uplift on your ISA pot is certainly not to be sniffed at. Don't forget that each person can have a Help to Buy ISA, so joint first time buyers can combine the benefit too.
Are there other options?
Low deposit mortgages
Those that already have a deposit will find that there's a good choice of mortgage deals now, even if it's a relatively small percentage of the purchase price. Interest rates on mortgages up to 95% of the purchase price have improved substantially.
However, if you can push to a bigger deposit the rates on offer are keener and each additional 5% that you can put down will help to improve your options.
What about Help to Buy Equity Loan?
If you are looking at new build properties but affordability is proving a problem despite having a deposit, the Help to Buy equity loan could be useful. The Government provides an equity loan of up to 20% (40% in London) alongside the buyer's 5% deposit.
Just remember that although no interest is payable on the equity loan in the first 5 years it will ultimately need to be repaid on sale of the property.
The Bank of Mum and Dad
Last but not least the Bank of Mum and Dad will be key to the aspirations of many first time buyers. It's very common for parents to help out their offspring by gifting them a lump sum to boost the size of deposit. Some may even get involved with the mortgage as a guarantor to help them borrow a bit more.