Help to Buy ISAs: do they work and were they mis-sold?

31 August 2016
What was claimed

Help to Buy ISAs won’t help you buy a home, because you still need to provide an initial exchange deposit when the contracts are signed and you haven’t been given the government bonus at that point.

Our verdict

Since initial exchange deposits are negotiated between the buyer and the seller, it’s possible to negotiate them down. The seller can agree to receive the rest of the money when the purchase completes.

What was claimed

Help to Buy ISAs won’t help you with your mortgage deposit.

Our verdict

Several banks have said that they will treat the bonus payments as part of the buyer’s savings when they apply for a mortgage, even though it won’t arrive in their bank account until after the sale is completed.

What was claimed

The Treasury has backtracked on its stated original aim about Help to Buy ISAs

Our verdict

This isn’t correct. The scheme was always intended to support the part of a house purchase that’s funded by the buyer, commonly known as a ‘deposit’ or ‘mortgage deposit’. The Treasury never said that it was meant to help with the initial exchange deposit that’s put down when contracts are exchanged.

“On Friday night 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.”

Daily Telegraph, 19 August 2016

“If you're saving for a deposit to buy a home, it turns out the Help to buy ISA will definitely not boost this by 25% - despite what anyone might have told you”

Daily Mirror, 22 August 2016

“…a major flaw in the ISA has been uncovered: savers won't receive the extra government money until after the property purchase has been completed. Ie, the extra money can't be used towards a deposit, which is the bit most of us are struggling with in the first place.”

Cosmopolitan, 24 August 2016

The Telegraph claims that the Treasury has backtracked on the stated aim of Help to Buy ISAs. This has been repeated in several other newspapers.

The claim is incorrect.

It mixes up the two kinds of ‘deposit’ that are involved in buying a house.

The Help to Buy ISA scheme allows savers to claim a government bonus on top of their savings when they apply to buy their first home. Those savings are commonly referred to as the ‘mortgage deposit’. It’s what most people are referring to when they talk about ‘saving for a deposit’, and what banks themselves describe as your ‘deposit’.

So it was reasonable for Mr. Osborne to call these savings ‘your deposit’ when he introduced them in his 2015 Budget speech.

The Treasury told us that the government bonus was never meant to pay for the initial exchange deposit.

This is an upfront payment that discourages the buyer from pulling out before they complete the deal. It’s made when the contracts are signed but before the sale completes, so before the bonus payments are provided by the government.

The Treasury said that the scheme had been communicated in line with existing government and industry practices, including information about when the bonus payments from the government would be made.

There are regulations that say it’s the responsibility of the banks who sell Help to Buy ISAs to customers make sure that they are promoted in a way that is ‘fair, clear and not misleading’.

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The government’s bonus payment will count towards a mortgage deposit

Some reports have also claimed that Help to Buy ISAs don’t boost people’s savings when they need a mortgage, because the payment isn’t made until after the purchase is completed.

In practice, that claim is incorrect too.

The bonus will still be counted by the bank towards a buyers’ mortgage deposit when they apply, even though it won’t have arrived in their bank account yet.

Financial magazine Moneywise told us that “mortgage lenders will treat the bonus as part of the buyers’ mortgage deposit, as if it’s already part of the buyers’ savings”.

And that’s also what six banks told the Financial Times.

We went down to our local bank with an ‘agreement in principle’ on a mortgage and asked about this point. The branch staff were unsure, but the adviser we spoke to over the phone thought that the bonus amount would be counted toward the deposit.

Initial exchange deposits can be negotiated down

Finally, some newspapers have claimed that because the government bonus can’t be counted towards an initial exchange deposit, the scheme will only help people who already have the money to buy a house anyway.

They say there’s not much point being promised a top-up on your mortgage deposit, if you can’t afford the initial exchange deposit that’s needed to sign the contracts.

This isn’t necessarily the case.

Initial exchange deposits don’t need to be a problem because they’re negotiable.

Moneywise told us that exchange deposits can be negotiated down if the buyer can’t afford it at that point in the process. As long as the seller is willing, they can agree to receive the full amount of money later on, when the sale completes.

Money Saving Expert makes the same point.

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