Help to Buy ISA: Living up to Expectations?
When the Help to Buy ISA was introduced in December 2015, first time buyers rejoiced: finally, a way to help them get on to the housing ladder! Yet more than two years down the line, as these buyers start to try to withdraw the funds they need for their first home, they are discovering that it really does pay to read the small print.
The Help to Buy ISA is available from a variety of banks, credit unions and building societies. It is available to first time buyers, and is a government bonus of up to £3,000, based on savings of £12,000 (so £15,000 overall).
You can save up to £200 a month, with an initial deposit of up to £1,200. This doesn’t apply per household, but instead per each first time buyer, so a couple would be able to use two Help to Buy ISAs to buy a house between them, and therefore could have £30,000 between them after the bonus.
The small print
For many, the impression was that a Help to Buy ISA would do exactly what it says on the tin, and help them to buy a house. However, the ‘small print’ declares that the money “cannot be used for the deposit … to pay for solicitors, estate agent’s fees, or any other indirect costs associated with buying a home.”
Instead, it can only be used as part of the purchase cost, e.g. on mortgage payments, at the end of the deal. So is it a help to buy scheme, or just a help-you-pay-off-your-mortgage scheme?
When introduced by the then-chancellor George Osbourne, he himself professed that it would provide “direct government support” for those who were saving for a deposit, and would help first time buyers to get on the housing ladder. Unfortunately, for many, it may actually do the opposite.
Those who set up their accounts in the early days on the basis of Osbourne’s comments (500,000 had signed up by August 2016), may have managed to save a proportion of the £12,000 maximum (with the yearly limit they will have only got to £7,600 by April 2018, which would give a bonus of £1,900, and therefore £9,500 overall), and may be looking to set up a mortgage on the basis of these savings.
An insider at HSBC told us: ”We’ve had a number of customers come in and try to withdraw the money to use for the deposit, and it’s only when we looked in to it further that we realised this wasn’t possible. We weren’t even told this was the case when the ISAs were initially being set up, and now buyers are upset to realise that they are actually thousands of pounds short for the deposit they expected to have.”
The reality
In reality, you really need two lots of savings: one for the deposit itself, and one to qualify for the help to buy 25% bonus. You cannot withdraw the money you have saved in the ISA to pay for the deposit without forfeiting the bonus. And what kind of first time buyer can really afford to have two huge pots of savings?
We carried out a poll of 300 Twitter users, which found that 78% of people were unaware that you cannot use a Help to Buy ISA for a deposit, suggesting perhaps that the government have not been clear enough on what a Help to Buy ISA is for.
The confusion may arise from the fact that a Help to Buy Equity Loan also exists. This is where the government lend you up to 20% of the cost of a new-build home, meaning you will only need a 5% deposit and a 75% mortgage to make up the rest. This 20% loan is interest free for the first five years. As this does cover the deposit, the confusion over Help to Buy ISAs may come from this. Although, the Equity Loan is starting to uncover problems of its own.
This isn’t to say that Help to Buy ISAs are a bad thing, you can still use them to pay off your mortgage and it is essentially £3,000 of ‘free money’. However, there does appear to be an issue in that many are unaware of what the ISA can be used for, and as such the government need to make transparency surrounding Help to Buy ISAs a priority, in order to prevent any other first time buyers believing they have more money for a deposit than they actually do.
