Help to Buy ISA: some myths busted

Barely announced and still several months from reality, there are already some myths and misconceptions around the Help to Buy ISA. We’ve tackled some of the main ones.

The £15,000 upper limit is inadequate as a deposit

Well, it’s true that in many areas – especially the south of England – trying to use the maximum of £15,000 as a 10% deposit is unlikely to get you very much, and probably even less in a few years time.

However £15,000 will also give you a 5% deposit on a £300,000 home, which is much more realistic for a first home. And no-one is saying this is the only saving a first time buyer can do – there’s nothing to prevent those who’re able also using other savings accounts to bolster their deposits, and the £1,000 personal savings allowance should act as a further incentive.

Of course whether people are able to save extra is another question entirely.

The £200 p/m limit is far too low – it’ll take 5 years to achieve the full benefit

Again this seems to stem from the assumption that no other saving is possible. With or without the Help to Buy ISA, someone who can’t save more than £200 per month (or obtain it through other means) is going to struggle with a deposit in any case.

What this scheme does is give a 25% return on a portion of savings that otherwise would achieve a much much lower rate.

It’s true of course that the maximum amount will take quite some time to get, but at bottom this is free money not previously available. In that context, whether you hit the full limit or not is neither here nor there – you’re still getting far more back than you would otherwise.

It’s not going to help anyone – only push prices up further

There is always a risk that helping the buyer simply fuels the greed of the seller, but the limited scope and long-term nature of the Help to Buy ISA means it’s unlikely to have a significant impact in and of itself.

It would be a different story if it allowed, say, a single £12,000 deposit from 1st April with the full 25% bonus available immediately. Or deposits of £1,000 or more per month. You could well see how that might translate into starter homes rapidly increasing in cost. We’ve no way of knowing, but it could be precisely such considerations that prompted the Treasury to impose the limits it has. That and limiting the cost to HM Govt of course.

There are other aspects that should limit the impact on house prices too. Affordability rules will likely limit borrowing capacity (again most relevant to those struggling to exceed £200p/m saving) so even if a higher price is theoretically possible, that won’t necessarily translate into practice.

And there’s a benefit to taking a smaller mortgage: at the time of writing a 95% mortgage is roughly 1% to 1.5% higher than a 90% scheme, so getting under the lower threshold could bring significant savings (for a £150,000 loan over 25 years, that’s getting on for £100 a month cheaper). Whether that’ll apply in 5 years time is anyone’s guess, but it’s the market current savers are looking at.

That said, there could be an indirect effect on prices: if the existence of this (along with the other support schemes and reduced stamp duty) generates more interest and confidence among potential buyers, the increased overall activity would be likely to push prices up. But it’d seem harsh to blame any particular scheme for that, rather than the chronic shortage of supply.



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