Help to buy – and saving for a deposit
Confusion over payment of the government bonus scheme is leaving first time buyers with holes in their finances
The Help to Buy Isa has come under fire for lack of transparency after it emerged first time buyers can’t use the bonus to boost their deposits.
When the scheme was launched in 2015, it was described by former Chancellor George Osborne as direct support “for anyone saving for a deposit on their first home.” Saving for a deposit is the largest hurdle for many first-time buyers.
But a smallprint technicality means a 25 per cent government contribution or bonus is not paid until the sale is completed and therefore can’t be part of the deposit.
About 45,000 property purchases have been delayed since 2015 because of this problem, according to One Family, a financial services group. Brokers have criticised the lack of transparency and there has been widespread confusion. So are Help to Buy Isas still worth it?
How the scheme works – and what went wrong
The Help to Buy account lets first-time buyers save up to £200 a month, to which the Government adds £50 or a 25 per cent contribution. To get the maximum £3,000 bonus, consumers must save £12,000. If a couple is buying a house together, they can each pay into a Help to Buy Isa.
The savings can be be put towards a property costing up to £250,000 or £450,000 in London.
Government, banks and building societies presented Help to Buy Isas as a way to save for a deposit. It later became clear a technicality means savers can’t access the top-up until completion because of concerns if sales collapsed, people would keep the cash. A deposit usually needs to be paid on exchange of contracts a few weeks before the purchase is completed and the money is received from the building society.
One in six people (15 per cent) of homeowners who bought a home using their Help to Buy Isa had not been able to use the money in their account as they expected, according to research by OneFamily, a financial services group.
This delayed nearly a quarter of the purchases using the Help to Buy Isa, equal to an estimated 45,0000, the survey found.
Ian Tubb, founder of City Sales and Lettings, said not being able to access the “free government money” to help pay the deposit is a fundemental “flaw” in a scheme set up to help first-time buyers.
He said: “Any extra cash is obviously a bonus but it needs to be available to pay the deposit and other costs like survey and solicitor fees – it’s difficult for first-time buyers to access all that money without the bank of mum and dad.
“If a first-time buyer borrows the shortfall from family or friends, they know they can pay it back after completion but it’s not ideal.”
Tim Kingsbury, director of Bushnell Porter Independent Estate Agents, added: “If you haven’t got anyone to top up the deposit you are stuck between a rock and a hard place. But he said it is still an attractive saving option, so long as savers are aware of the limitations before opening an account.
“Help to Buy Isa is still a great way of saving if you are regimented enough to do so monthly. You are saving your money and it’s being added to with free government cash, but people need to be aware of all the criteria.”
Newly-wed Sharlotte Dewdney, 28, is among the first-time buyers who was totally unaware of the scheme’s restrictions.
Sharlotte and her architect husband, Jamie, opened two accounts with Halifax and Barclays to help them save for a deposit on their first home in Plymouth: a three-bedroom, semi-detached house, costing £201,000,
The couple had £19,000 saved in the Isas with £1,500 to be paid to them as government top-up. They had saved the maximum £200 per month in each account on top of an initial £1,000 deposit.
Sharlotte, an estate agent, said: “I really thought the government bonus could go toward the deposit as otherwise what’s the point of the scheme? Saving for a deposit is the hardest part for first-time buyers.
“But then we heard rumours, saw posts on Facebook from others who had got to the finishing line before us and articles in the press, that it couldn’t and there was all this uproar and confusion. As first-time buyers, we were terrified our plans wouldn’t work out.”
She said it wasn’t made explicit in marketing material that the bonus couldn’t go towards a deposit.
Finding themselves short of the 10 per cent deposit, their conveyancing solicitor instructed them to close both accounts and get closing statements, evidence to show their building society of the government top-up.
“We had the money but couldn’t physically touch it. We were £1,500 short of the 10 per cent deposit but we were still able to exchange with our £19,000 and the mortage company got the bonus shortly after exchange.
“Technically, you can’t use the bonus for a deposit because you don’t get it until after completion. But if you have local solicitors who know what they are doing, you can still exchange.”
Sharlotte said relying on the bank of mum and dad was not an option for them. “We are one of the few in our family who have managed to buy our own home. So it is quite an accomplishment and it only took seven years of saving!”
Alternative accounts – Lifetime Savings Account (Lisa)
The Lifetime Isa also has a 25 per cent bonus and allows consumers aged between 19 and 39 to save a maximum of £4,000 per year. So for every £4 ou save, you get £1 extra – up to £1,000 per tax year. People can save until they are 50 and use the money to purchase their first home or a pension.
Savers can use it for a deposit and the limit for properties outside London is higher at £450,000 .
The Help to Buy Isa scheme is due to close next year. A Lifetime Isa is potentially a more attractive option for first-time buyers as the bonus can be used to help pay a deposit, it has a more generous maximum bonus and a higher price limit for properties.