First-time buyers (or parents of) take note: the government is trying to help. A new, tax-free savings account will be launched on Tuesday aiming to help first-time buyers save up for their deposits more quickly, with the fillip that the state will put extra money into the pot. But are these savings accounts any better than other investments?

 

So what’s the idea?

Like the well-known cash and stocks and shares ISAs, the new Help-to-Buy ISAs are tax-free savings vehicles. They have been set up with the aim of helping people boost the amount they can save towards a first home. Savers (or their parents) can put up to £1,200 in the accounts initially, followed by up to £200 a month. The government will then provide a bonus of 25 per cent, up to £3,000. So anyone who puts in £12,000 of their own money will get the £3,000 maximum government contribution. It will take around five years to get to this point.

 

Who can have one?

You have to be 16 or over, a UK resident and a genuine first-time buyer. You are also barred from having another active cash ISA in the same tax year.

As an added boost, the accounts are available to individual first-time buyers and not individual households, which means that both partners could open a Help to Buy ISA and eventually receive a joint bonus of up to £6,000.

 

What are the terms and conditions?

Unfortunately, the government’s apparent generosity comes with multiple strings attached. These include a cap on the value of the property being bought, at £450,000 for a home in London or £250,000 outside the capital. The government’s literature also says that properties purchased with funds from the Help-to-Buy ISA must be your only home and cannot be rented out. That could prove awkward for someone who gets married or moves abroad, and is forced to sell or leave empty a property the government forbids them from renting out.

 

What are the interest rates?

British lenders have started to roll out their deals. The Halifax is offering a 4.0 per cent rate of interest, which appears generous considering the UK base rate is 0.5 per cent. Nationwide, another lender, offers a 2.0 per cent interest rate plus the ability to access its Save to Buy mortgage range, which promises £500 cashback.

 

Are these ISAs good ideas?

Saving £12,000 over five years and then receiving £3,000 from the government is, even before interest is paid on the ISA, a 25 per cent return. This makes the product just about the best risk-free investment rate out there. The drawback is being forced to put the money you have saved towards a property, which must be below a certain value and which must not be rented out. And by the time you have saved the maximum, the amount may no longer be enough for a deposit. Still, this is a problem faced by all first-time buyers, whatever savings vehicle they use.

 

And are they any better than buying shares?

In this tax year, it is possible to save £15,240 into a tax-free stocks and shares ISA, giving you a tax-free return on buying equities. It is not wildly optimistic to expect a 5% to 6% annual return from an equity fund, depending on market. Five years is a riskier time horizon for stocks, however, as market conditions will impact returns, and so generally the risks outweigh the potential benefits in the short-term.

 

How the Help-to-Buy ISA beats a Cash ISA

Imagine a couple each save £200 a month, having started with the maximum £1,200 lump sum.

  •  Assuming the Help-to-Buy ISA pays interest of 2.0%, after three years and one month the couple will have saved £8,568 each, including interest.
  •  The government would then give them a 25 per cent bonus of £2,142 each to purchase a home, taking their individual savings up to £10,965.
  •  Combining their money, the pair would have £21,084.

 With a standard cash Isa on an interest rate of 1.5%, in three years and one month the couple would have £17,220 — £3,864 less than in the Help-to-Buy ISA example. It would take the couple another ten months of saving to make up the difference.

 

Conclusion

Potential first-time-buyers (or their parents and grandparents) should beat a path to the doors at Nationwide and The Halifax, as there look to be very few arguments against opening a new Help-to-Buy ISA.