Help to Buy ISAs

If you’re saving with a Help to Buy ISA, the government will contribute an additional 25% of your savings towards the mortgage deposit of your first home. If you missed the deadline to apply for one, find out why a Lifetime ISA might be the right choice for you.

If you’re saving with a Help to Buy ISA, the government will contribute an additional 25% of your savings towards the mortgage deposit of your first home. If you missed the deadline to apply for one, find out why a Lifetime ISA might be the right choice for you.

Anelda Knoesen
From the Money team
4
minute read
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Posted 20 AUGUST 2021

What is a Help to Buy ISA?

A Help to Buy ISA is a type of savings account that’s incentivised by the government to help first-time buyers save up a deposit to secure a mortgage. 
 
As with other Cash ISAs, the money you save in a Help to Buy ISA and the interest you earn are tax-free. What makes the Help to Buy ISA special is that when you use it towards the mortgage deposit on your first home, the government will contribute an additional 25% of your total savings. 

How do Help to Buy ISAs work?

When you use the money saved in your Help to Buy ISA towards the mortgage deposit on your first home, the government will contribute an additional 25% of your total savings. 
 
The Help to Buy ISA scheme is now closed to new applicants, but formerly you could open a Help to Buy ISA with an initial deposit of £1,200. Each month you can deposit up to £200 into your ISA (£2,400 a year, not counting the initial deposit), up to a maximum total of £12,000. For every £200 you save, the government scheme will contribute an additional £50. It will take over four years to reach the maximum contribution but, if you do, you can earn an extra £3,000 towards your deposit. 
 
Because the ISA is connected to the first-time buyer and not the property, if you’re saving to buy your first home with a partner and they also have a Help to Buy ISA, you can use the savings from both towards your house purchase. So, if you’re both keen savers, you could get up to an additional £6,000 from the government towards your deposit.  

To qualify for the bonus, you have to meet certain conditions: 

  • you need a minimum of £1,600 saved in your Help to Buy ISA 
  • you’re a first-time buyer and you don’t own any other property, anywhere in the world 
  • you’re buying a house with a purchase price under £250,000 (or £450,000 in London) 
  • you intend to live in the home, not rent it out.

Your savings are not tied into a house purchase. You can withdraw money or close your ISA at any time, but you’ll only receive the bonus if you use your savings towards buying a new home. 

How do I claim the bonus? Is it applied directly to my account?

You won’t see the bonus appear in your Help to Buy ISA like you would with interest, because you’re only eligible for it when you use the savings to buy your first home. When you’re ready to buy, you need to apply for the bonus through your solicitor – don’t withdraw your savings directly or you could lose your bonus. 
 
Once you have an offer accepted on a house, follow the steps below to claim your Help to Buy bonus: 

  1. Tell your ISA provider that you’re ready to buy and ask them to close your account. They’ll send you a closing letter. 
  2. Give the closing letter from your ISA provider to your solicitor or conveyancer and ask them to apply for the government bonus. 
  3. Your solicitor will receive the bonus and they’ll add the full amount to your deposit to complete the purchase.

Your mortgage provider will also take the bonus into account when calculating your mortgage loan amount. You don’t need to have a Help to Buy mortgage to use the bonus, but you can use the Help to Buy ISA bonus alongside the home equity loan offered by the government. 

Has the coronavirus had an impact on Help to Buy ISAs? 

Yes, the coronavirus pandemic has affected many financially, and people with Help to Buy ISAs are, unfortunately, no exception. Interest rates have plummeted because of the pandemic, which means savings accounts like Help to Buy ISAs have suffered. If you’re on a fixed-interest rate, then you’ll be unaffected, but for people who are on a variable rate, you’ll have probably found that your interest rate has fallen significantly, meaning you won’t be earning as much tax-free interest on your savings. 
 
At the start of the coronavirus pandemic, HM Treasury announced temporary changes to Help to Buy ISA rules. This gave buyers up to 15 months, from the date they closed their account, to claim their bonus, instead of the usual 12 months. However, this rule change has since expired. 

What are the benefits of a Help to Buy ISA? 

There are plenty of benefits of having a Help to Buy ISA: 

  • Earn up to £3,000 in government bonuses – the government will contribute an extra 25% towards your savings, up to the cap of £12,000. This means, in four years, you could earn an extra £3,000 in bonuses.
  • Interest you earn is tax free – not only will you get the government bonuses, but you’ll also be earning interest with no tax to pay. This makes it a really tax-efficient way for savers to buy their first home. 
  • You can save with a partner – if you’re saving towards buying a house with your partner for shared ownership, you can both save with a Help to Buy ISA and both receive the benefits. This means, together, you can receive up to £6,000 in government bonuses, as well as the tax-free interest you’ll earn. 

What if my house sale falls through? Can I reopen my Help to Buy ISA?

Buying a home is rarely straightforward, so it’s comforting to know that if your property purchase doesn’t go through, you have the right to reopen your Help to Buy ISA account. 
 
To reopen the account, you’ll need to get a Purchase Failure Notice (PFN) from your solicitor or conveyancer to send to your ISA Provider. You need to send this within 12 months of the date you closed your Help to Buy ISA account. 

Can I still open a Help to Buy ISA?

Unfortunately no, the deadline for new Help to Buy ISA applications closed on 30 November 2019. But if you already have a Help to Buy ISA open you can continue to pay into it until 30 November 2029. After that deadline passes you have a further 12 months to claim your bonus on a house purchase – up to 1 December 2030. 
 
If you missed out on the deadline for opening a Help to Buy ISA, you could consider a Lifetime ISA instead. The Lifetime ISA (LISA) is a new type of incentivised savings account, designed to help people between the ages of 18-39 save up for their first home and for retirement.

What has replaced the Help to Buy ISA? 

While they’re not a like-for-like replacement, Lifetime ISAs do offer similar benefits to Help to Buy ISAs. Also known as a LISA, Lifetime ISAs are a government scheme designed to help people under 40 save towards their future. Savers can deposit up to £4,000 into a LISA, each year, and you’ll receive a 25% bonus from the government. This means you could earn up to £1,000 in bonuses each year, while also earning tax-free interest. 
 
LISAs aren’t just for buying you’re first home though, you can also use them to save towards your retirement. You can open an account between the ages of 18-40, make deposits until you’re 50, and withdraw your savings either when you buy your first home or retire. 

Do you have to pay back a Help to Buy ISA? 

No, the interest and bonuses you earn with a Help to Buy ISA are completely tax free and don’t need to be paid back. This makes government schemes like a Help to Buy ISA well worth considering for savers looking to buy their first home. 

What’s the difference between a Help to Buy ISA and a Lifetime ISA?

Like the Help to Buy ISA, the LISA also includes a 25% savings bonus from the government. You can save up to £4,000 a year until your 50th birthday, so you can reap even bigger rewards.   
  
If you save the maximum amount for the full life of the LISA, you end up with a bonus of up to £33,000. Plus, the bonuses are paid monthly so you can really watch your savings grow.   
  
You need to wait a year from opening your LISA if you want to use it to buy a home. You can either use it on a house purchase of up to £450,000 in a similar process to the Help to Buy ISA or, if you don’t need to use your LISA to buy a home, you can withdraw the money after your 60th birthday to help pay for your retirement. If you take the money out before then, you’ll have to pay a penalty for early withdrawal and you’ll lose your bonus.   
  
Even if you already have a Help to Buy ISA you can still open a LISA and pay into both in the same tax year, up to the current total ISA limit of £20,000 - but you’ll only be able to use one towards buying your first home.   
  
Read our guide to find out more about Lifetime ISAs.

Can I switch from one Help to Buy ISA provider to another?

Yes, if you find a better interest rate with another ISA provider you can switch, as long as your new ISA provider agrees to the transfer. Make sure you complete the transfer through the ISA provider; if you withdraw the money yourself, you’ll lose out on the government bonus. 

Can I switch from a Help to Buy ISA to a Lifetime ISA?

Yes, you can transfer your savings into a Lifetime ISA but any money you move will count towards the annual deposit limit for the Lifetime ISA. Currently, this is £4,000 per year. If you do switch, you’ll lose the Help to Buy bonus but the savings you transfer will instead qualify for the LISA bonus. 

For more information on the different ISA accounts available, read our guide.

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