Many of the 500,000 savers will be reviewing their Help to Buy ISAs over claims that a technicality means they cannot be used for a deposit on a new home.
First announced back in 2015, Help to Buy ISAs were described by the then Chancellor George Osbourne as being “Direct support, for anyone saving for a deposit on their first home.”
But, recent reports indicate that a ‘flaw’ in the scheme means that the 25% Government bonus cannot be used as part of a deposit on a new home. The bonus is only paid on completion, leaving those that have put down an exchange deposit with a black hole in their finances, and having to secure additional funds to complete their purchase.
Exchange deposits are commonly paid by the buyer to the seller on exchange of contract. These are usually 10% of the value of the property and provide security to the seller should the buyer want to pull out of the deal. The 25% Help to Buy ISA bonus, cannot be used for this, as it’s only paid on completion of the mortgage, so the buyer must fund this part of the deposit themselves. Some buyers had failed to factor this when opening their Help to Buy ISA account.
In addition to the flaw, savers are also being hit with falling interest rates. When the Help to Buy ISA scheme was launched, Halifax and Santander both offered 4% interest on savings. In response to the Bank of England base rate cut of 0.25%, these have now fallen to 2.5% and 1.5% respectively. At these rates it would take well over 4 years to save the £12,000 requires to get the maximum £3,000 bonus from the Government.
It also seems that many of the banks and building societies don’t quite understand how the accounts works. It’s been reported that some of told customers to close the account in order to receive the bonus, whilst others refer savers to the gov.uk website for information. This lack of clarity has led to calls for MPs to provide a swift fix for the problem.
The best rates around
Despite the problems, Help to Buy ISAs still remain an attractive option for first time buyers. A £3,000 return on £12,000 worth of savings beats any other savings account, even if the bonus isn’t paid until after completion.
From April 2017 the Lifetime ISA will be made available, allowing those under 40 to save up to £4,000 a year which will be topped up by an annual 25% bonus. The bonus will paid every year from the age of 18 to 50 up to a maximum of £32,000.