Is the Help to Buy ISA misleading?
8 Sep 2016 | COMMENTS: 0 | Author: Carlo Ruggiero | General
Last year, just before the Help to Buy ISA was announced, I purchased my first home. With a modest deposit saved over a number of years, I became the proud owner of three-bed terrace in a Yorkshire suburb.
While my partner and I were able to afford the deposit, it’s no secret getting onto the housing ladder is becoming increasingly difficult for young people. House prices are rising faster than people can save, with an increase of 10.1% this year.
And so, the Government introduced the Help to Buy ISA back in December 2015. Offering a 25% Government bonus towards your first home, it’s been hugely well-received, with over 500,000 opened so far.
Help to Buy controversy
This month, controversy surrounds the Help to Buy ISA. The Government are being accused of misleading the public, while they attempt to shift the blame over to ISA providers.
The issue? First time buyers can’t actually use the Government bonus towards their home exchange deposit.
Limitations of the scheme means the bonus is only awarded following completion of the property purchase.
Let’s do the maths
A couple saves the maximum amount in their own respective Help to Buy ISA for two years.
That’s £200 a month for 24 months – £4,800
Add their initial £1000 allowance each – £5,800
Now double it (because there’s two of them saving), and you’ve got £11,600.
Most people believed the 25% Government bonus would be added to the home exchange deposit, meaning a grand total of £14,500 is available for your conveyancer to secure your home. A 10% deposit would allow the couple to buy a house at around £145,000.
Except, this is where the confusion sets in.
The bonus can’t be used on the home exchange deposit, but only on the mortgage deposit following completion. Without the 25% bonus on their deposit, this drops the money they can give the buyer down to £11,600.
As far as the banks concerned, they’ll have enough for their mortgage to be accepted once the bonus is applied. But not enough beforehand to actually complete the sale if the seller insists on the full 10%.
This is now leading to many first time buyers turning to credit cards or, more likely, friends and family for that extra cash to close the deal.
Where’s the problem?
There’s no inherent problem with the Government’s bonus. It still technically increases your deposit. But the controversy lies around how this was introduced, presented and sold to the public.
The biggest problem facing ‘Generation Rent’ in getting on the property ladder is not mortgage rates or monthly payments: current rates are some of the lowest they’ve ever been, with mortgages usually being cheaper to afford than most private rent.
As house prices continue to rise, that initial 10% deposit becomes less and less achievable. The scenario used here is also quite the anomaly; the average first-home deposit currently hovers around the £33,000 mark.
Many people were relying on the 25% bonus to reach the full 10% for the home exchange deposit. These people have now found out they’ll have to negotiate a lower deposit with the seller, find the extra cash elsewhere, or continue saving.
Misleading the Public
The Help to Buy ISA was introduced in George Osborne’s 2015 Budget.
“This new Isa provides direct government support to anyone saving for the deposit on their first home.”
Many are arguing Osborne’s words were misleading, as it only counts towards the mortgage deposit. So while it wasn’t a lie, the whole facts clearly weren’t communicated. And it doesn’t stop there.
Once providers started marketing the products, the wording continually failed to clarify the difference in the deposits.
On the HSBC website, it read: “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 per cent of the amount you save, up to a maximum of £3,000.”
Halifax had a promotional video, stating it helps customers “save for a bigger deposit”, while Natwest’s site said their Help to Buy ISA would “help save for the deposit on your first home”.
News sources like The Telegraph article cited have been adamant the Help to Buy ISA has misled a whole nation of savers. But for the most part, the big confusion just seems to have been between the two deposits. Some additional clarification on the difference between a home exchange deposit and a mortgage deposit could have avoided much of this confusion early on.
Is a Help to Buy ISA still worth it?
When it comes down to it, the Help to Buy ISA still does what it says on the tin. It offers you a 25% Government bonus on your savings as a contribution toward your mortgage deposit.
By getting a heads up now, you can make sure you understand the difference between the two deposits, and can adjust your savings plan accordingly if needed.
Next year also sees the introduction of the Lifetime ISA. This offers similar perks to the Help to Buy ISA, but allows you to contribute even more savings at once, to build your deposit even quicker. As we understand it, the Government bonus on a Lifetime ISA will be paid annually, so it can be used for the home exchange deposit.
Want further reading on Lifetime ISAs? Check out our blog ‘A Lifetime ISA Sounds Great – But is it Really Better than the Good Old Pension?’
Get the right advice
If you’ve already done the maths and found the Help to Buy ISA’s a good deal, then this isn’t likely to change. To know you’re getting the right financial advice, it’s important you get a good conveyancer. Make sure you tell them upfront you’re hoping to buy with a Help to Buy ISA, and make sure they understand the product. Tell them your concerns over these recent controversies and gauge how they respond.
There’s nothing that states a home exchange deposit has to be a full 10% of the purchase price; this minimum amount only applies to the mortgage deposit. And as we know, the bonus can be used for your mortgage.
A good conveyancer should be able to negotiate with the vendor and agree a lower deposit.
Ultimately though, the seller doesn’t have to agree to a lower deposit. But the difference between, say, a 9% deposit over a 10% deposit really shouldn’t matter to them. The house sale should still complete, and they’ll still get the full amount once it does.
Getting the right advice is vital. Don’t be put off by controversies in the mainstream press. Do your own research, speak with somebody in the know, and find out what the best savings method is for you.
While we can’t help you find a good conveyancer, we can point you in the direction of a financial advisor. They could help you to improve your finances, managing your money for the better.