Help to Buy tweak will help first-time buyers raise deposit

The Government has tweaked the Help to Buy Isa scheme to clarify how the 25% Government bonus can be used.

It will introduce a second savings scheme, a Lifetime Isa, known as a Lisa, next year which will be able to be used as part of an initial deposit on a property when contracts are exchanged.

In recent weeks commentators have criticised the design of the scheme because the Government bonus is not paid until the property sale has been completed, which means potential homebuyers using the scheme that want to use the bonus as part of their deposit, have been left with less than they thought they would have for the deposit.

Danny Cox, chartered financial planner at Hargreaves Lansdown said the change “will help first-time buyers’ cash flow as the cash will be ready when needed.”

The Treasury has agreed to allow Help to Buy Isa savers to be able to transfer the Government bonuses into a new Lifetime Isa from the beginning of the next tax year in April 2017, which will be able to be used for deposits when contracts are first exchanged on properties up to a value of £450,000.

Those aged 18-40 will be able to open a Lifetime Isa and pay in up to £4,000 a year, on which the Government will pay a bonus of up to 25%, up to a maximum of £1,000 each tax year.

Money saved into Lisa's can’t be used for a year after being opened, so savers won’t be able to use the bonuses for deposits for at least another 18 months. However, savers can pay into both a Help to Buy Isa and a Lisa in the same tax year but can only use the government bonus from one of the accounts to buy their first property.

The Treasury’s U-turn also undermines there previous claim that it couldn’t let Help to Buy Isa bonuses to be used for exchange deposits in case people committed fraud to claim the bonus and subsequently did not buy the house or because it would cause administrative difficulties.

Meanwhile, last week the Treasury published a note announcing that interest on the bonus will be paid monthly rather than annually, allowing savers to benefit from compound interest.

A spokesman for the Treasury said: “To protect government funds, if the house purchased does not complete within 90 days the conveyancer must return the funds to the provider. If they do not, a 25% charge is due, which HMRC has the powers to recover.”

The Help to Buy Isa allows savers to put away an initial lump sum of up to £1,200, followed by up to £200 a month towards their first home. It offers a government bonus worth 25% of the savings up to a maximum value of £3,000.

Lisa terms mean savers withdrawing from the accounts other than to buy their first home, or before the age of 60, will face a 30% government charge on the amount they withdraw losing the 25% bonus, plus a 5% penalty.