The Innovative Finance ISA, which launches in April and will allow peer-to-peer loans to be made tax-free, isn’t the only new type of ISA around.
This week saw the launch of the Help to Buy version, a savings scheme designed to help people take their first steps on the property ladder. ISA holders can save up to £200 a month (with an extra £1,000 lump sum allowed when the account is opened) and the government will add a bonus worth 25% of the deposits up to an overall limit of £3,000.
Topping up your house deposit savings
This means that, over the course of just under five years, each ISA holder can save up to £12,000 and get this topped up to £15,000 by the state when they complete on their first property purchase.
In addition to this, they will be able to earn whatever interest providers of Help to Buy ISAs offer. Halifax, for example, has already attracted a considerable amount of attention for the 4% annual interest it is paying on its Help to Buy ISA – although it should be borne in mind that this is less than is available on certain regular savings accounts, on which monthly deposits are similarly limited.
But will it be enough?
But while this new ISA offers would-be first-time buyers a welcome boost in their bid to purchase a home, the rate of recent house-price increases suggests that it might not be enough on its own.
As Kevin White at financial advisor deVere points out: “Even with the maximum Help to Buy ISA saving plus the government bonus, meaning a total of £15,000, most first-time buyers will still find that they’re £15,000 short for the average deposit.”
Reaching the average first-time buyer deposit
Figures published by analyst Moneyfacts.co.uk in September found that the average deposit on a first home was now in fact just under £32,000.
Equally, if you’ve already managed to put together a few thousand pounds, the Help to Buy ISA won’t do much to increase the value of those savings given the restrictions on how much you can put in.
How peer-to-peer lending can help you reach your house deposit target
All of which means that anyone serious about getting on the property ladder needs to do more than the bare minimum offered by the Help to Buy ISA. This is where peer-to-peer lending could be of use: Zopa’s interest calculator shows that someone who lent an initial £5,000 through the platform and then added loans of £150 a month for the next five years would generate capital of £16,403. This is the expected total value after defaults and before tax – although this money could be held in the new Innovative Finance ISA from April 6 next year which would mean no tax was payable.
While P2P lending means that your capital is at risk, Zopa mitigates this risk by ensuring each customer’s loans are spread among a large number of borrowers, thus reducing the potential impact of any defaults.
Combined with the £15,000-plus generated by the Help to Buy ISA, this extra capital would offer a far more realistic chance of being able to afford to buy a home.