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Banks may pinch Help to Buy Isa tax break to boost profits

  • Investigation reveals banks may pay less than 1% on Help to Buy Isa
  • Help to Buy Isas offer bonus of up to £3,000 on savings for home deposit
  • But banks may pay sub-standard rates and rely on attraction of bonus
  • Maximum savings of £200 a month allowed in – which get a £50 top-up

Sylvia Morris For The Daily Mail

Banks look set to use the Government’s new first-time buyer Isa as a cash cow — by paying a pittance in interest to young savers.

The flagship tax-free Help To Buy savings accounts, which give those saving for a house deposit a 25 per cent bonus, were intended to provide a major boost to anyone hoping to get on the property ladder.

But we understand many of the big names who will offer these Isas — unveiled by the Chancellor in his March Budget — will pay less than 1 per cent in interest, far lower than they give on mainstream accounts.

Callous: Banks look set to use the Government's new first-time buyer Isa to cynically boost their own profits

Callous: Banks look set to use the Government’s new first-time buyer Isa to cynically boost their own profits

In effect, the banks will be pinching the tax breaks that savers would normally get. It will be a major blow to those desperately trying to scrape together a deposit and who want to take advantage of the Government’s bonus.

Money Mail has discovered they could be as low at 0.7 per cent tax-free — less than half the rate you can earn on a run-of-the-mill cash Isa.

If you saved £200 a month at 0.7 per cent, you would earn only £9 interest in your first year from the bank. At 1 per cent, you’ll accrue just £13 in interest.

And the rates will be variable, which means they can be cut at any time — or you could find that when base rate does finally rise from its historic low of 0.5 per cent, your rate won’t match the increase.

By contrast, top deals on run-of-the-mill savings accounts include HSBC’s 6 per cent to its current account holders — or £78 interest a year on £200 savings.

‘Banks are taking the tax break aimed at first-time buyers to increase their own margins,’ says Justin Modray, of independent financial adviser Candid Money.

‘Their behaviour is very much against the spirit of the Help To Buy Isa, which is designed to help first-time buyers save the large deposit they need more quickly.’

The Help to Buy Isa: A bonus of up to £3,000 on savings

 The Isa is designed to tackle two of the biggest challenges that face first-time buyers: low interest rates on savings and the high deposits required by the banks before they will give you a mortgage.

The account works like an ordinary Isa — you save regularly and the banks should pay you tax-free interest.

The difference is that the money has to be used for a house deposit and when it is, the Government will add a bonus of up to £3,000.

Homebuyers are also limited on the maximum value of the property they can buy — outside London it is £250,000, and £450,000 in London.

You can save up to £200 a month and will earn a top-up of £50 each time. The bonus is paid when you put down your deposit for your first home.

HOW LONG TO GET A £3K BONUS?

If you put the initial £1,000 deposit that is allowed into a Help to Buy Isa, it would take 55 months to save the remainder to get to the £12,000 maximum.

So the minimum time needed to get the full £3,000 bonus is four years and seven months.

You can kick-start your plan by putting in an initial lump sum of up to £1,000, within a month of opening the account.

To get the maximum bonus, you’ll need to save up to £12,000, and there is no time limit as to how long it takes to save it. At the end, you’ll have £15,000.

The minimum bonus is £400, so you need at least £1,600 in your account to qualify.

Couples who are buying a home together can each take out a Help To Buy account, so they will get a total of £6,000 between them in bonuses. This boosts their £24,000 of saving to £30,000.

The bonuses will give you a huge 25 per cent tax-free top-up on your savings when you use them as a deposit on your first home.

That’s the equivalent of earning 45 per cent on a year’s regular savings in a taxable account.

The Isa is designed to tackle two of the biggest challenges that face first-time buyers: low interest rates on savings and the high deposits required by the banks

The Isa is designed to tackle two of the biggest challenges that face first-time buyers: low interest rates on savings and the high deposits required by the banks

Banks don’t have to take part and may not play fair 

But banks are not obliged to take part in the scheme. And as the launch gets closer, it has become clear that not all the High Street names will be offering these deals.

Big names Barclays, Lloyds, Halifax, Bank of Scotland, NatWest, Royal Bank of Scotland and HSBC, as well as Nationwide, have told Money Mail they will reveal their plans next week.

Other large building societies, including Leeds, Skipton and Coventry, have no plans to launch one while Yorkshire hopes to have its account operating early next year.

The Government’s own savings bank National Savings & Investments won’t offer a plan, but says it keeps its product range under constant review to meet the needs of savers.

With a lack of competition, particularly from NS&I, this is likely to keep rates low.

What is frustrating for savers is that the bonus on these accounts still makes them a good deal — but it is the taxpayer who is rewarding them for saving, not the banks.

And ordinary savers who don’t benefit from the Government bonus get a far better rate.

‘It is shocking if providers think that just because the Government is adding a bonus they can pay a pittance in interest,’ says Susan Hannums, director at the savings adviser Savings Champion. 

‘These schemes are designed to help young savers get on the housing ladder and realise their dream.

‘The least providers can do is support savers trying to build a deposit.’

A spokesman for the British Bankers’ Association says: ‘The Help To Buy Isa is a Government initiative. It is a commercial decision for individual banks as to what they offer.’ 

THE HISA: HOW THE HELP TO BUY ISA COULD HELP WITH YOUR DEPOSIT

How will the Help to Buy Isa work?

A Help to Buy Isa is a tax-free savings account that can be used by first-time buyers to fund a deposit on a property.

You can save up to £200 each month and the government will provide a 25 per cent bonus on each amount saved and the interest earned.

So for every £200 you contributed, you can get £50 from the government. You will also be able to set up the account with a £1,000 deposit on top of the £200 contribution, meaning you could start off with £1,250 when you include the government money.

This isn’t an endless pot though and the maximum government contribution you can get is £3,000. This means you will only get the government bonus on up to £12,000 worth of Help to Buy Isa savings. That will give you £15,000 towards a deposit.

Saving £200 each month to get £12,000 would take five years.

If you put the initial £1,000 deposit that is allowed in, it would take 55 months to save the remainder to get to the £12,000 maximum – four years and seven months. 

So far it is unclear whether providers will let you save more on top of the £12,000.

Can I have a Help to Buy Isa alongside my Cash Isa?

You can’t save into a cash Isa and a Help to Buy Isa in the same tax year.

If you have already opened a cash Isa since April 2015 you will need to close this and transfer the balance, if allowed by the provider.

You can open a new cash Isa every year, but with the Help to Buy Isa you are only allowed to open one Help to Buy Isa that you then hold onto and contribute to each tax year.

Help to Buy Isas are available to individuals, rather than households, so if you are buying with another first-time buyer you could combine your savings. This means a couple could save up to £30,000 with the government bonus.

You can still put money into a stocks and shares Isa. So if you put in £2,400 a year of your Isa allowance into the Help to Buy product, you still have £12,840 you could invest, based on the current allowance.

How long can I have a Help to Buy Isa for?

You can keep your Help to Buy Isa open and contribute for as long as you like from December 1 2015. But the scheme will be closed to new savers on November 30 2019.

You can take your money out at any time, but you only get the bonus when you are putting a deposit down for a house. 

What happens when I am ready to use my deposit?

You will only get the government contribution once you close your account.

Once you have saved up the amount required for your deposit you would need to close you Help to Buy Isa account.

Your solicitor or conveyancer will then apply for the government to pay the bonus amount.

They can only charge a maximum of £50 plus VAT to process your bonus payment.

You will need a minimum of £1,600 to get the government bonus, which would pay you £400.

The government bonus will be calculated based on the amount of money you have in your account when you close it. This includes both the money you have saved, and any interest you have earned on that money. You will not receive a government bonus of more than £3,000.

The money raised can only be used for a first-time buyer residential property worth up to £450,000 in London or up to £250,000 elsewhere.

Who offers Help to Buy Isas?

Barclays, Lloyds Banking Group, Nationwide, NatWest, Santander, and Virgin Money have all signed up offer Help to Buy Isas.

However, none has released a product.

There is no requirement to take out a mortgage with the lender who provides your Help to Buy Isa, so it is worth shopping around for both the best Help to Buy Isa rate and mortgage deal.

ISA DEALS OF THE WEEK

 

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