Aug
2016
The Not Much Help to Buyers ISA
DIY Investor
21 August 2016
In an expose in the Daily Telegraph the Government’s much trumpeted Help to Buy ISA was described as a ‘scandal’ because first-time buyers will not be able to use it for an initial deposit on their new home.
As chancellor, George Osborne said that the Help to Buy ISA provided ‘direct government support’ for those saving for a deposit, helping ‘Generation Rent’ on to the housing ladder and 500,000 savers subsequently opened accounts.
However, the Telegraph identified a flaw in the scheme which means that the 25% government ‘bonus’ to reward savers is not paid out until the sale has completed, which renders the scheme technically useless as it was designed and sold as a solution for those who are struggling to find the initial deposit on a property.
First-time buyers are usually required to provide a deposit of at least 10% of the value of the home on exchange of contracts; for many first-time buyers this is all the equity they have to put into the purchase but the bonus cannot be used for this initial deposit, it can only be spent as part of the purchase cost.
Whilst is may be useful to cover some future mortgage payments, it is no use to those that cannot raise the 10%, meaning that the Bank of Mum and Dad may still have to remain open.
The Treasury has admitted that the clause was included to stop people benefiting from the bonus without actually buying a house.
The Help to Buy ISA launched in 2015 to allow savers to invest £200 a month to which the Government adds £50, up to a final total of £15,000.
So far fewer than 1,500 people have used them to help buy a home as the limit on how much can be paid in means they have only just accrued a realistic amount to put toward a deposit; but those nearing the required sum will find that they cannot use the bonus as part of this deposit.
High street banks and building societies have said they were unaware of the restrictions, which state: ‘The bonus cannot be used for the deposit due at the exchange of contracts, to pay for solicitor’s, estate agent’s fees or any other indirect costs associated with buying a home’ and have been selling the ISAs on the premise that they can be used to boost home deposits.
‘the bonus cannot be used for the deposit due at the exchange of contracts’
As an example, HSBC’s website reads: ‘Saving up for a deposit for your first home? Open an HSBC Help to Buy ISA and the UK Government will reward you with an additional 25% of the amount you save, up to a maximum of £3,000.’
Halifax claims the product helps customers ‘save for a bigger deposit’ and Natwest provides an online tool to show how a Help to Buy ISA could ‘help save for the deposit on your first home’.
These claims are in line with Mr Osborne’s comments when he launched the scheme: ‘This new ISA provides direct government support to anyone saving for the deposit on their first home.’
In response to the Telegraph article, the Treasury backtracked on the stated original aim, claiming it was never intended to boost deposits; a spokesman insisted the bonus was instead designed purely to reduce the size of buyers’ mortgages by boosting the equity they put in on completion and its website has been doctored accordingly.
It thus appears that the original objective of the Help to Buy ISA – to assist those that cannot afford a deposit on a property – has been ditched and that the product is now effectively a perk for those that can already afford to buy.
The Not Much Help to Buyers ISA will therefore do little to address the single biggest impediment to those seeking to get on the housing ladder – a first-time deposit which according to Halifax now averages £33,000.
Treasury has sought to distance itself from confusion over the Help to Buy ISA scheme and blame the banks for any lack of clarity, stating: ‘It has always been the case that money saved in a Help to Buy ISA is for an exchange deposit, with the bonus of up to £3,000 per ISA from the Government going toward the total funds available for the property transaction.’
‘will do little to address the single biggest impediment to those seeking to get on the housing ladder’
A Treasury source insisted that Help to Buy had never been designed as a deposit saving scheme, with sources saying any of the 500,000 customers who have already signed up and are unclear should ‘take it up with their bank’; that will come as no comfort to those that find a hole in their expected savings and have to find an alternative source of often expensive finance.
However, when launching the scheme Chancellor Osborne said: ‘A 10% deposit on the average first home costs £15,000, so if you put in up to £12,000, we’ll put in up to £3,000 more.’ And many feel it is simply not acceptable for the Treasury to walk away from thousands who have saved diligently in the realistic expectation of getting on the housing ladder.
Tim Farron, leader of the Liberal Democrats, said: ‘Philip Hammond must now take urgent action to sort out the mess. This time it is not an omni-shambles, it is a housing shambles, and all those people conned by the Conservative ‘Help to deceive’ scheme will now be looking to the new Chancellor to put this right.’
However, thus far the Treasury has looked unlikely to blink: ‘The Help to Buy ISA is hugely popular and thousands of bonuses have been paid out since its launch in December 2015. The ISA is helping more than half a million first time buyers save towards their first home. The Government has published clear guidance and the industry is fully aware that the bonus is only paid on completion.’
This episode looks as though it has some way to run, but in the meantime the losers are those that feel they have had they dream of property ownership snatched from them by a product that was at the very least not explained clearly to them; the reality may be even less palatable.
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