*UPDATE: The Help to Buy: ISA scheme closed to new applicants after 30th November 2019, though this doesn’t mean that first-time buyers can no longer get bonuses from the government to put towards the cost of buying a home. For more information, read our guide.
Help to Buy ISA can give you a boost if you’re saving to purchase your first property, but can you use the funds to serve as your mortgage deposit?
We’ve put together this guide to Help to Buy ISAs and deposits to answer this question, explain what your options are and outline how the right mortgage broker can make sure you get the support you need for this.
Can I use a Help to Buy ISA as a house deposit?
We often hear questions like “can a Help to Buy ISA be used for a home deposit?” and while the answer is yes, think carefully about whether this is the right option for you.
How does a Help to Buy ISA work?
The scheme allows first-time buyers to save for a home tax-free and pick up a government cash bonus of up to £3,000 at the end. Account-holders can pay up to £200 each month (£1,200 in the first month as a one-off) and the government will add an extra 25% to this.
To get the full £3,000 you would need to pay a total of £12,000 between the day you open the account and the completion of your mortgage agreement.
Here’s the important part that to consider if you’re thinking about using your Help to Buy ISA as a deposit: funds saved in the ISA can be used towards the deposit at the exchange stage.
Can I put funds from my Help to Buy ISA towards a deposit?
We’ve also had customers ask us things like “can I use Help to Buy ISA funds as part of my exchange deposit?” and the answer is yes. You can use capital that you’ve saved up in the account to top up your exchange deposit.
Savers request a closing statement from the ISA provider before the saved funds are withdrawn. The bonus is then calculated on the balance as stated on the closing statement.
The closing statement is then passed to the solicitor who will claim the bonus from the government, so whether saved funds are used towards the exchange deposit won’t make any difference to the amount of bonus you receive.
You should keep in mind that if you withdraw funds from your ISA and then change your mind about using them for the deposit, you might not be able to put them back into your account, as the account provider may not let you deposit more than £200 that month.
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Can I put my Help to Buy ISA bonus towards a deposit?
Technically speaking, there are two types of deposit needed for a house purchase: the exchange deposit and the mortgage deposit (although the same funds are generally used for both). Your Help to Buy ISA bonus can only help you with one of them, in most cases.
Using a Help to Buy ISA for the exchange deposit
As the exchange deposit is due when the contracts are exchanged (i.e. before completion), your government bonus won’t be available at this stage, but there’s no reason why you can’t use capital in your ISA to pay it.
How to use your Help to Buy ISA for a mortgage deposit
The mortgage deposit is due on completion and would usually be footed using the same capital as the exchange deposit, but technically speaking, your government bonus would be available at this stage and can be used to pay off any outstanding fees.
If you won’t have the full deposit amount until your government bonus has paid out, it may be possible to negotiate a deal with the lender. If you’re upfront about your reliance on the scheme and can provide evidence that the bonus is incoming, some providers will allow you to pay off part of the deposit at the point of exchange and the full amount on completion.
The advisors we work with have access to every lender on the market, so if you find yourself in this situation, make an enquiry and they will introduce you to the provider who is best positioned to take a flexible approach to your mortgage application.
How much money can I deposit in a Help to Buy ISA?
The first deposit you make into your Help to Buy ISA can be up to £1,200. After that, you can drop in a maximum of £200 a month until there’s £12,000 in there. Saving the maximum amount means you’d get a government bonus of £3,000 on completion of your home purchase.
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How do I get the best rates on a Help to Buy ISA mortgage?
Many of the customers who ask us about Help to Buy ISA deposit rules also want to know how to get the best rates on their Help to Buy ISA mortgage, and this generally comes down to two things: meeting the eligibility requirements at as many lenders as possible and using a whole-of-market broker to find the best deals you qualify for.
Most mortgage providers base their lending criteria on the following factors…
How much deposit you have
Most lenders will expect you to put down at least a 10% deposit on a residential property, although some may be willing to offer you a Help to Buy ISA mortgage with just 5% deposit. That said, if you’re in a position to put down more than the minimum, it can help convince the lender to offer their most favourable rates and reduce the level of risk.
Although your Help to Buy ISA bonus cannot usually be used for the exchange deposit, you can use funds from the account to pay it.
Your credit report
Lenders usually prefer borrowers with clean credit, but it may be possible to find favourable rates from a specialist bad credit mortgage lender if you’ve had credit issues.
You can download your credit reports to see how your credit record currently looks before you apply.
If you’re buying your first property in later life it may be more difficult to get the best rates on a Help to Buy ISA mortgage, due to their being fewer approachable lenders.
Some mortgage providers have upper age caps and won’t lend to anyone over 75. Others go up to 85 and a minority will lend to a pensioner of any age, as long as they are convinced the borrower can keep up with their mortgage payments during retirement.
There are also lenders who are cautious of customers who will pass retirement age during the course of the mortgage term.
The property type
To be eligible for the government bonus, the property must have a maximum purchase price of £250k (or up to £450k in London).
If the property you’re buying has elements of non-standard construction (e.g. thatched roof, timber frame), the best rates might be more difficult to come by as some providers consider this higher risk. Specialist lenders, however, may be able to offer you a favourable deal.
Income and affordability
Most mortgage providers cap their lending based on x4.5 the borrower’s salary. Some go up to x5 and a minority x6, under the right circumstances. If you’re looking for a mortgage with self-employed income or applying for a mortgage with commission or bonus income to factor in a specialist lender might be required.
The more confident the lender is that your declarable income will cover the mortgage, the more likely they are to offer you a good deal on your Help to Buy ISA mortgage.
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