Help to Buy ISA: savings bonus can't be used for exchange deposit

Flaw in flagship Government scheme means the bonus on offer won't count towards savers' initial deposit.

The Government’s Help to Buy ISA scheme has come under fire again, this time over when the savings bonus is paid out.

The Help to Buy ISA allows first-time buyers to save up to £2,400 a year tax-free (plus an extra £1,200 in the first year).

Not only do these deals offer decent rates of interest, but the Government also promises to pay a 25% bonus up to a maximum of £3,000 when you use the money you’ve saved to buy a home.

Read more in our guide to Help to Buy ISAs, which explains how they work, as well as the rules and rates for first-time buyers.

The scheme was introduced by former chancellor George Osborne last year as a way to help first-time buyers save for a deposit. He said at the time: “This new ISA provides direct Government support to anyone saving for the deposit on their first home.”

More than 500,000 savers have opened the accounts to take advantage of this big money giveaway and the Treasury says 22,000 have sucessfully used the initiative to buy a home.

However, as more and more savers try to cash in their ISA, a significant flaw in the scheme has come to light surrounding when the bonus is paid out by the Government.

While you can use the amount you have saved in the Help to Buy ISA – along with the bonus it will attract – to secure a mortgage, the extra cash isn't actually paid until completion.

The problem some are finding is that they need this promised cash for something known as the exchange deposit, which is a sum of money needed to seal the deal (usually 10% of the purchase price) before completion when all the money is handed over.

Essentially, this means a buyer will need to have enough money in their account to cover the deposit without the help of the Government bonus, which critics say defeats the point of Help to Buy ISAs.

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The next mis-selling scandal?

This fundamental flaw may come as a shock to first-time buyers and both providers and the Government are being accused of failing to make it clear to savers from the beginning.

Since this flaw was revealed by The Telegraph on Friday, the Government has updated its Help to Buy website to put this vital restriction on the front page.

It now states: "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."

It seems the Treasury didn't really think through how not making this bonus amount available for a fundamental stage in the home buying process might impact sales, especially for buyers where their exchange deposit matches the value of their whole deposit for a property.

A Treasury spokesman said: “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.”

It also says the clause helps prevent people getting the bonus without actually buying a property and maintains it has been clear that the bonus is payable on completion from the beginning, though now the message is displayed more prominently rather than in the FAQs section of the site.

Many are saying that this restriction actually defeats the point of the Help to Buy ISA as the bonus doesn't help towards the initial deposit needed, which could see a deal fall through and although stated in the small print with the Government is nowhere on the promotional material offered by many major lenders.

Halifax claims on its site it can help customers "save for a bigger deposit", while HSBC’s site says "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."

Some have taken to Twitter to question whether mortgage lenders are mis-selling what the Help to Buy ISA can actually do.

Halifax very clearly say Help to Buy ISA is to “boost savings towards a deposit” Isn’t this mis-selling? #HelpToBuy pic.twitter.com/PXgBEImALW

— Oliver Smith (@OliverSmithEU) August 20, 2016

Other flaws

This is not the first time the Help to Buy ISA has come under fire.

Another catch with the Help to Buy ISA is that the bonus is only available on properties worth up to £450,000 in London or up to £250,000 in the rest of England.

A BBC investigation recently found that the Help to Buy ISA was only helping the lucky few as rising house prices mean that many are unable to find homes that meet these criteria.

It found that the average cost of a starter home is too expensive for many to benefit from the bonus.

For example, asking prices on a two-bedroom starter home exceeded the cap in 67% of areas in the South East, 65% in London, 61% in the South and 53% in the East of England.

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This article has been updated since it was first published

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