Not sure how to use first-time buyer schemes? Rest easy. Here's how they work.

By Iona Bain
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So you’ve streamlined your outgoings and you’ve reined in the unnecessary spending. Congratulations!

Now it’s time to make sure the hard-saved spare cash is put to work in the best way possible, and believe it or not the government is on your side. It backs two special ISA's (Individual Savings Accounts) aimed at first-time buyers saving for a deposit.  Both offer to top up your savings with a free 25 per cent bonus. If you want to know know what to do after you've found the property of your dreams - have a look on this article on how to make an offer. Now, if you're one step closer and want to know what happens after your offer is accepted, have a look at this.

Help to Buy Isa

The Help to Buy Isa is open to new customers until December 2019.  It allows you to save up to £12,000 over five years, with £1,200 allowed in the first month then £200 a month up to the limit. The 25 per cent bonus is only credited when you stop saving and need to withdraw.  At this point, the total pot has to be transferred direct to your solicitor or home conveyancer (to make sure you don’t blow it on something else). The minimum fund to qualify for the bonus is £1,600. If you stop saving and don’t use it for a deposit, you lose the bonus, and you may also lose that better than normal savings rate.

If you  open a Help to Buy Isa before December 2019  you'll still get the bonus added as long as you use it for a deposit before 2030.

Lifetime Isa

The Lifetime Isa will not launch until April 2017. It will work in the same way as the Help to Buy Isa, but the annual limit is not £3000 but £4000 a year, so it is more generous. It is also designed as an alternative to long-term saving or a pension.  If you are over 18 and under 40 you can use it to save until you are 50 and still get a 25 per cent bonus, or up to £1000 every year. However, there is a major catch:  the pot cannot be withdrawn until you are 60, otherwise the bonus is removed altogether and there is also a five per cent penalty charge.

How they work

Saving £200 a month into a Help to Buy Isa would build a £10000 deposit after four years and two months, with a £2000 government bonus available to your solicitor or conveyancer (some of which might be needed for fees).

Saving £300 a month into a Lifetime Isa (from April 2017) would build a deposit of £18000 after five years, with a £3600 top-up available as long as a transaction was completed.

Choosing a lender

As with everything else, do your homework on the Help to Buy Isa. Some banks and building societies will offer a sweetener to tie you into one of their mortgages, but this might restrict your choice when you come to need the all-important home loan.  However, if it is a lender with a reputation for offering competitive mortgages to first-time buyers with smaller deposits, then signing up for their Isa is probably a sound move. You are allowed to transfer the Help to Buy Isa between providers, if you are determined to chase the best rates, though you can only have one account. If you do decide to transfer, do not take the money out yourself or you will lose the benefits.

Other rules

The Help to Buy bonus will only be available on homes worth up to £250,000, or £450,000 in London boroughs. Unlike some other government schemes, you're not restricted to buying a new build. It must be bought with a residential mortgage, including shared ownership, but not a buy-to-let loan.

You can withdraw money without losing anything except the bonus on that amount, though the rules will depend on the provider.

Equity loans

There is also the Help to Buy equity loan, available from most lenders until 2020 for properties in England worth up to £600,000 but only on new-build homes. This is a loan - not a giveaway - where you save a five per cent deposit and the government adds a 20 per cent loan.  It’s interest-free for five years then repaid at a starting cost of 1.75 per cent, the rate rising with inflation plus one per cent. It can be repaid at any time without penalty. See helptobuy.gov.uk.

This loan may be extended to include Starter Homes –another scheme still in the pipeline which will be restricted to specific housing schemes on brownfield sites. So keep your eyes peeled.

 

London, Wales and Scotland

Help to Buy offers double the loan in London – up to 40 per cent – to help with runaway property prices.

Help to Buy (Wales) supports buyers with a 5 per cent deposit on properties worth up to £300,000. Help to Buy (Scotland) works in the same way but with limited availability and lower property values. The upper limit will drop from £230,000 in 2016 to £200,000 in 2017 and £175,000 in 2018.

Mortgage guarantee

Until the end of 2016, the Help to Buy mortgage guarantee boosts your deposit from 5 percent to 20 per cent with a government guarantee to the lender of up to 15 per cent but no extra borrowing or repayment.

Help for tenants

There is also Social HomeBuy which allows council and housing association tenants to buy at least 25 per cent of their home, with up to 3 per cent rent a year payable on the rest.

Housing associations also offer shared-ownership “staircasing” agreements, where you buy part of your home to start with and add more in future.

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