The Help to Buy ISA Scandal Explained
If you’ve seen the news over the past few days, you’ll be aware of the Help to Buy ISA scandal. The Telegraph has exposed a clause in the Government’s scheme, which could see the Treasury facing legal action.
At the end of last week, the Help to Buy ISA scheme was described as a “scandal”, after it emerged that first time buyers will not be able to use the Government’s bonus for an initial deposit on their new home.
More than 500,000 hopeful buyers have opened a Help to Buy ISA account since the former chancellor, George Osborne, launched the scheme on the basis that it provided “direct Government support” for those saving for a deposit.
However, it has now emerged that a flaw in the scheme means the 25% Government bonus on savings will not be paid out until the property sale has completed.
Experts claim that this clause renders the scheme technically useless, as it was designed for those struggling to find the initial lump sum to put down on a home, and means that many will still be reliant on loans from family members, if available.
Homebuyers are typically required to provide a deposit of 10% or more of the property’s value when they exchange contracts. For many first time buyers, this is all the equity they have to put into the purchase.
The small print of the scheme means the Government bonus cannot be used for this initial deposit, and can only be spent as part of the purchase cost, for example, on mortgage payments, once the deal is complete.
The Treasury has been forced to admit that the clause was included to stop people having access to the bonus without actually buying a home.
The Help to Buy ISA Scandal Explained
The accounts, which launched last year, allow customers to save up to £200 per month, to which the Government adds 25%, up to a final total of £15,000.
So far, less than 1,500 people have used the ISAs to help them buy a home, as the limit on how much can be paid into the account each month means they have only just accumulated a realistic amount to put towards a deposit.
Andrew Boast, of SAM Conveyancing, comments: “It is a scandal. The Government launched this scheme declaredly to help people save the large exchange deposit required to buy a home. But what unsuspecting first time buyers are now horrified to discover is that, under the scheme rules, they cannot use the bonus as part of this deposit.”
Sources at high street banks 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.”
Banks and building societies have been selling the ISAs on the premise that they can be used to boost deposits. They may now be forced to change their advertising.
HSBC’s website 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% of the amount you save, up to a maximum of £3,000.”
A promotional video by Halifax claims it will help customers “save for a bigger deposit”, while NatWest provides an online tool to show how a Help to Buy ISA could “help save for the deposit on your first home”.
The advertisements reflect Osborne’s comments when he launched the scheme. He claimed: “This new ISA provides direct Government support to anyone saving for the deposit on their first home.”
Since the scandal broke, the Treasury has backtracked on the original statement, claiming it was never intended to boost deposits. A spokesperson insisted that the bonus was instead designed purely to reduce the size of buyers’ mortgages, by boosting the equity they put it on completion.
After The Telegraph raised the issue, the Treasury also updated its Help to Buy ISA web page, making the clause more prominent.
Experts, who had previously praised the scheme, have now criticised it for simply providing a “perk” to the savers who could already afford a home.
Sky-high deposit requirements remain the greatest barrier to homeownership across the country, the Intermediary Mortgage Lenders Association reports. Halifax claims that the average first time buyer deposit is now a huge £33,000.
The Head of Financial Planning at Hargreaves Lansdown, Danny Cox, adds: “Hundreds of thousands of Help to Buy ISA savers risk finding a last-minute hole in their finances.”
HSBC insists that it has trained staff to ensure they provide all of the relevant information when a customer opens an ISA.
A Halifax spokesperson says it would not be appropriate for it to go into details of the scheme rules with customers, as the Treasury has already defined them.
NatWest believes the scheme has helped some of its customers buy a home.
A Treasury spokesperson states: “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.”
The Managing Director of the National Association of Estate Agents, Mark Hayward, responds to the scandal: “This is quite an extraordinary step from the Government and providers to effectively change the goal posts for first time buyers who have saved in a Help to Buy ISA. Consumers have been putting money aside on the basis that they believed it would be applied to their deposit on a new home. To now clarify that it is not actually available until completion is the perfect example of a painful lack of transparency, and frankly, nothing short of deception.
“First time buyers are already struggling with getting onto the housing ladder, and this much hyped initiative was welcomed at the time as a way of helping them, but in fact could have ended up costing buyers if they have gone ahead with a purchase believing that the bonus counted towards the deposit.”
What do you think of the Help to Buy ISA scandal?
