A new scheme aimed at helping first-time buyers build deposits could be undermined by the poor rates being offered by leading lenders.
Experts have warned that the appeal of the new help-to-buy Isa, in which the UK government tops up tax-free cash savings, depends largely on the offers from providers. And while some lenders have launched eye-catching rates of up to 4 per cent, others (including the Clydesdale) are paying little more than the base rate, while some – most notably Royal Bank of Scotland – have opted to stay out of the market entirely.
The idea behind help-to-buy Isas, which launched on Wednesday, is simple. Prospective buyers (or their parents) can deposit £1,200 into the account initially, then save up to £200 into it each month.The interest is paid tax-free, as on any cash Isa, and the government then pays in a bonus of 25 per cent of the amount saved, up to a maximum of £3,000.
So to get the full government contribution you need to save £12,000 of your own money, although the maximum annual deposit of £3,400 (compared with the £15,000 maximum on a normal Isa) means that would take a few years. You can receive the bonus whenever you take the money out, however, provided you’ve deposited at least £1,600. To ensure the proceeds are used for a mortgage deposit, the bonus is paid to a solicitor at the point of house purchase.
The product is available to each individual, which means that if you and a partner are both saving for a deposit, you can each open a help-to-buy Isa and so get up to £6,000 from the government.
There are a few conditions, however. The maximum value of a home bought with the proceeds is £250,000 and it must be your only home. If you’re thinking of using it towards a buy-to-let property, therefore, that’s forbidden under the help-to-buy rules.
The scheme doesn’t include the option of stocks and shares Isas that could potentially offer far more savings growth.
One in three first-time buyers surveyed by Money.co.uk and not planning to open a help-to-biy Isa either felt the limit was too low or they wanted an investment option. A quarter said it took too long to earn the bonus and the same proportion again didn’t want to be tied into a government scheme.
Several also noted that the value of the property that can be bought with a help-to-buy Isa won’t increase each year, meaning rising house prices could be a deterrent.
So what kind of deals are available? The top rate is from Halifax, at 4 per cent. But Bank of Scotland, its fellow Lloyds Banking Group brand, is offering just 2 per cent. Virgin pays 3 per cent, Barclays 2.27 per cent (from 17 December) and HSBC, Nationwide, Lloyds and NatWest all offer 2 per cent. However Santander pays just 1.5 per cent (2 per cent for 123 World and Select customers) and the Clydesdale and Yorkshire Banks are offering a derisory 0.7 per cent. Those paying the lowest amounts are effectively relying on the bonus offered by the government to entice savers through the door.
All of the help-to-buy rates are variable, which means the most competitive deals could well be reduced at some point in the future.
Some providers offer a “split Isa” to circumvent the rule barring savers from opening both a normal cash Isa and a help-to-buy Isa in the same tax year. Split Isas, offered by providers including Nationwide and Aldermore, include the two types of Isa within one wrapper, subject to the maximum annual Isa allowance (currently £15,240).
But help-to-buy should be taken up by anyone saving for a deposit, regardless of the concerns over the rates offered, according to Robin Purdie, director of MOV8 Financial in Edinburgh.
“The pros outweigh the cons as far as I can see. I
“It won’t be a short-term fix for many, but the returns (with the bonuses) will be better than any other risk-free method of saving,” he said.
The accounts should be used alongside other measures.
“Many first-time buyers could still do more to help themselves as well,” said Purdie.
“For example, many still don’t qualify for 95 per cent mortgages because they have not bothered to get on the electoral roll or update their credit commitments/banking to any new address that they may be renting.
“Savings efforts could be undone by this when it comes to applying for the mortgage.”