December 2015 will see the launch of the government's latest efforts to help first-time buyers, with the 'Help to Buy ISA'
This type of ISA (Individual Savings Account) is specifically for first time home buyers with the main draw being that the government will add 25% onto savings accrued, which can then be put towards the deposit on a home. Aside from that there is the additional bonus that all of the savings will be tax free when you withdraw them.
Who can get one?
The scheme is specifically aimed at first time buyers. That's to say that if you've previously owned a home, but now (for whatever reason) don't, then you won't qualify for the scheme. However at the moment it's unclear how this may translate to more complicated scenarios; for example you're a first time buyer, but your partner is not.
How does it work?
Upon opening an account you can instantly deposit £1000, which is additional to the maximum £200 you're allowed to deposit each month.
The government will top up your account, by 25% on top of what you've deposited – thus each month by depositing £200, yourself, £250 actually goes into your account.
The minimum you need to save in total before the government will add any funds is £1,600, and the maximum you can deposit is £9,000; meaning the government will give you a total of £3,000 towards a deposit.
When it launches, the ISA will be available through all participating banks and building societies, with rates being set independently by the lender. So in practice, you should also earn interest on your savings – on top of the 25% donated by the government.
Cashing out your bonus
The bonus isn't calculated or paid until you buy a property – unfortunately, you'll never see the cash the government stumps up. During the process of buying your home, your bonus will be tallied up, and you'll be awarded a voucher which will transfer the money directly to your mortgage provider – you therefore don't get any money unless you actually buy a home.
At the moment it appears that the government intends the money to be used solely for the purchase cost of the property – and not the associated transaction costs. As a result you'll need to use the money towards the deposit for the property as opposed to the legal and other such fees.
Whilst it's going to be a handy tool for some new homeowners, there are a number of things you need to be aware of. First of all the maximum deposit amounts mean that it will take you approximately 4 years to get the full £3,000 bonus, so if you're ready to buy now, it might be of little use to you. That being said you can get some of the bonus at least – if you have £1,000 to deposit instantly and can afford to put another £200 in each month, then you can cash out after 3 months, having saved the minimum amount of £1,600 – at which point you'll have earned an additional £400 on top.
Aside from that you can't open a Help to Buy ISA open alongside a normal ISA during the same tax year – you have to choose one or the other. You can of course open one if you have cash ISAs from previous years. If this is of particular concern to you, or if you want to save more than the maximum £200 each month, you might consider holding a standard savings account, or opening a stocks & shares ISA instead.