Aside from the government bonus, you will also earn interest from your provider, which is why it’s so important to compare the options to make sure you’re getting the rate that could help you meet your goal. With the right account, you could soon have enough saved for at least a 5% house deposit (though bear in mind that the bonus can’t be used towards your initial deposit, as it can only be applied for on completion. We discuss this more below). What's more, if you and your partner are both first-time buyers and each save for a deposit using the best Help to Buy ISA available (there's only one allowed per person), you'd get double the bonus and would have enough together for a much bigger deposit, which could allow you to get a better mortgage deal.
Find out how to save for your first home
You won't see the Government bonus in the ISA itself, as it only gets applied to your savings once you are close to buying your first home. You'll first have to close the account and obtain a closing balance statement from your ISA provider. Your solicitor or conveyancer will then apply for your Government bonus on your behalf and include the money with the funds consolidated at the completion of the property transaction. This means you won't be able to use the bonus to put towards your initial deposit.
If you've only got a 5% deposit with the bonus, this means you'll need to get the seller to allow you to use a smaller deposit at the exchange stage, as you'll be asked to put down your deposit earlier to commit everyone to the sale. It can be confusing, having to place the deposit at the exchange stage and not seeing your Government bonus added until the completion stage, but your solicitor (as well as your sellers) will hopefully understand and help you through it. Just remember to tell them in advance, so they can take it into account.
There are of course some restrictions to this Government scheme. You will have to be at least 16, a UK resident and not own any property anywhere in the world to open an account. Then to get the Government bonus, the home you're buying needs to be in the UK, cost no more than £250,000 (£450,000 in London), be purchased with a mortgage and not be rented out (though you may be able to change your property to a buy-to-let investment later down the line).
If you've already opened a cash ISA in the current tax year (which runs from April to April), you'll only be able to transfer those funds, and even then only up to £1,200, into a Help to Buy ISA; you won't be able to open an additional active account. This is because you're only allowed to open one of each type of ISA per year, and Help to Buy ISAs are considered the same as cash ISAs (and largely follow the same rules).
If you've put more than £1,200 into the new cash ISA, the extra funds would need to be put into a stocks & shares ISA (as you are allowed to get both a Help to Buy and stocks & shares ISA in the same tax year), an innovative finance ISA, a stocks & shares lifetime ISA or a non-ISA account. ISAs you've opened in previous years do not count, though you won't be able to save more than your annual ISA allowance across all your ISAs. For the 2018/2019 and 2019/20 tax year, this allowance is £20,000.
Aside from having to be at least 16 and not yet a homeowner, there's nothing stopping you from opening a Help to Buy ISA, unless you've opened a cash ISA this tax year already. The process of opening one is the same as with any savings account; you can open the account by contacting the provider you want through any of the 'account opening' methods the ISA allows, and they'll tell you what to do from there. To make the most of it, you'll want to set £1,200 aside to place into the account straight away.
If you see a Help to Buy ISA that offers a better rate, it's possible to transfer your current funds over to it. Contact the provider you want to move to so they can set things in motion through the proper channels. Do not take the money out of your ISA and then put it into a new one yourself, as this would count as opening a new ISA and could even have tax implications.
Find out how to transfer a cash ISA
There is one exception to the rule that says you can't open and contribute to a cash ISA and Help to Buy ISA in the same tax year, and that's when a provider offers a linked ISA range. However, the interest rates on these combined accounts can be lower than those on a regular Help to Buy account.
Furthermore, as you're able to transfer your cash out of a Help to Buy ISA at any time (if the specific account allows unlimited access) and put it into a cash ISA or non-ISA savings account (you'll just lose the Government bonus), there's no reason why you shouldn't just compare Help to Buy ISAs and try saving in the best one you can find.
Note that you will only be able to open a Help to Buy ISA until 30 November 2019, which is when the scheme closes. After this, you'll still be able to save into such an ISA and claim the Government bonus until 1 December 2030.
There are certain things you cannot do with a Help to Buy ISA, such as buying a first home for the purposes of renting it out, using the Government bonus for any reason other than to buy a home and getting the bonus if you've already bought a house. It's important to be aware of the limitations surrounding Help to Buy, to make sure you can get the most out of it.
However, there's nothing stopping you from withdrawing your money out of a Help to Buy ISA if you decide not to buy a house. And the interest rates offered on these ISAs can rival or even beat their regular cash ISA counterparts. So, if you are eligible, why not give it a try?
Even if you're just half a year away from buying your first home, by saving the maximum you'd still be able to get a £550 Government bonus, plus any interest you manage to accumulate. And once you've saved up enough to get the maximum Government bonus, there's nothing stopping you from looking around to see if there's a better savings account out there wherein you can keep saving.
While having the Government bonus added only upon completion can make things a bit awkward during the exchange stage of buying your first home, it also means that it's harder to lose the bonus. If you've closed the account to buy your first property and the sale ends up falling through, you will be able to reopen your ISA and save the bonus for when you do successfully complete a house purchase. Note that your solicitor will need to fill in a purchase failure notification for you to show that your purchase did not complete, and that you can't use the funds to open a different account.
An alternative way to save for a house purchase with the help of a Government bonus has now presented itself, in the form of a lifetime ISA. This latest Government saving scheme allows you to save £4,000 per year, with a 25% Government bonus offered up to the age of 50. This means you'll be able to get a much bigger bonus of £32,000 if you save the maximum each year from the age of 18, which can be used for either purchasing a first home or retirement.
What's more, you will get the maximum £1,000 Government bonus paid into your account every year, rather than paid directly to the seller upon completion, so you'll be able to gain interest on your bonus money as well as your own cash, and use the funds for a deposit at the exchange stage of buying a house rather than completion. Note that interest won't be taken into account for calculating the bonus, so you'll have to invest the maximum allowed amount yourself to make the most of it.
There are some downsides that could outweigh the possibility of getting a bigger Government boost. Unlike a Help to Buy ISA, getting your funds out of a lifetime ISA if you change your mind will result in a penalty (after the first year) that is greater than the bonus, which means you could end up with less than you put in. Then there's the fact that almost all lifetime ISAs are of the stocks & shares variety.
Only consider stocks & shares ISAs if you’re comfortable with an element of risk. There’s no guarantee of returns and you may end up with less than you put in, with returns dependent on stock market performance rather than a set interest rate.
Help to Buy ISA rates, because they are a form of cash ISA rather than a stocks & shares ISA, are more reliable. Even a variable rate ISA will still offer you some interest on your money, whereas the stock market investment that comes with almost all lifetime ISAs (at the time of writing) means you could end up with less than you originally put in if your investments perform poorly.
So, like with any comparison between cash and stocks & shares, you'll have to decide for yourself whether you'd rather have flexibility and guaranteed growth, or risk losing some money.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.