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Help to Buy ISA: does it actually ‘help’?

Posted on 20th October, 2016

house-for-sale

The Government backed Help to Buy ISA scheme was launched in Autumn 2015 with a view to assisting first time buyers get on the property ladder. Under the scheme, first time buyers may make an initial lump sum deposit of £1,200 to kick-start the account, with subsequent monthly deposits being capped at a maximum of £200 per month. The Government has committed to paying a 25% bonus on the total savings at account closing meaning that if a saver deposits the maximum allowance of £200 per month, the Government will top the savings fund up by £50 per month. There is no minimum monthly payment however a minimum total saving of £1,600 is required before the Government bonus element can be claimed. The maximum Government bonus which can be claimed is capped at £3,000, meaning that £12,000 will need to be saved into the account which will take approximately four and a half years. The scheme is only available to first time buyers aged 16 years or over who are resident in the UK, have a valid National Insurance Number, do not own any interest in land and do not have another active cash ISA in the same tax year. In order to claim the Government bonus element, the property being purchased must be in the UK with a maximum purchase price of £250,000 (or £450,000 in London), must be purchased with the assistance of a mortgage and the buyer must reside at the property. The Help to Buy ISA is available to all first time buyers who meet the eligibility criteria and therefore for first time buyers buying a property with a partner, both parties are entitled to use their individual Help to Buy ISA with the associated bonus towards the purchase.

So what is the problem?

The scheme has recently been criticised for being flawed amidst claims that it does not actually help buyers save towards their first home. Some ISA providers advertised that the Government bonus element (additional 25%) could be used towards the deposit which is required at the point of exchange. This is not in fact correct as the Government bonus element can only be used at the point of completion. The official line from the Government is that ‘the bonus must be included with the funds consolidated at the completion of the property transaction. The bonus cannot be used for the deposit due at the exchange of contracts, to pay for solicitors, estate agents fees or any other indirect costs associated with buying a home’. The position is therefore abundantly clear that the Government bonus cannot be used towards the deposit at the point of exchange and is only available upon completion. To fully appreciate the implications of this, it is important to understand two crucial points in the conveyancing process – exchange and completion.

Exchange

Exchange is the point that both parties, the Seller and Buyer, are legally committed to the transaction. It is also the point at which a firm date for completion is agreed and if either party fails to complete by the date specified in the Contract, that party will be held to be in breach of Contract. For the Buyer, it is also the point at which deposit funds must be available to effect the exchange. The presumption is that a 10% deposit will be payable by the Buyer at the point of exchange unless a lesser deposit has been agreed. The key point to remember, and the main criticism of the scheme as outlined above, is that the Government bonus element is not available at this stage of the transaction. What this means is that savers will be able to use their own funds which have accumulated in the Help to Buy ISA towards the exchange deposit, but they will not be able to use the additional 25% paid by the Government until completion. The issue with this is that a significant number of first time buyers who have opened a Help to Buy ISA have done so under the impression that the total funds accumulated in their account i.e. their own funds plus the 25% Government bonus would be available to use for the deposit and are now left in a position whereby they do not have sufficient funds to exchange. Please see below worked example:

First time buyer:

  • Opens account in January 2016 making maximum initial deposit of £1,200;
  • Makes maximum monthly payments of £200 into the account until March 2017 (totalling £2,800), saving a total of £4,000;
  • Calculates Government bonus element at £1,000 and includes this within figures for deposit;
  • Requires deposit of £5,000 and therefore believes they have sufficient funds for exchange deposit. The issue is that the £1,000 Government bonus which the first time buyer in the above example has included within their calculations is not actually available for the deposit and so the first time buyer will have to either continue saving over a longer period of time or borrow funds from another source should they wish to proceed with the transaction.

Completion

Completion is the final stage of the conveyancing process and is effectively the point at which purchase monies are transferred from the Buyer’s Solicitor to the Seller’s Solicitor. Once purchase monies are received by the Seller’s Solicitor, the Seller’s Solicitor will confirm completion to the Buyer’s Solicitor and authorise the estate agents to release keys. This is the point at which the Buyer becomes the legal owner of the property and, importantly, the point at which the Government bonus element can be used. Continuing with the worked example above:

First time buyer: 

  • May now use £1,000 Government bonus element towards final purchase price of the property;
  • So if the total purchase price is £50,000, the presumption is that the Buyer will be required to pay a £5,000 deposit;
  • The outstanding balance at completion is therefore £45,000;
  • The £1,000 Government bonus may now be applied meaning that the Buyer will require a £44,000 mortgage. The main criticism being raised by first time buyers is that they need assistance raising the deposit as this is usually a considerable lump sum amount which they must have readily available at the point of exchange in order to commit to the transaction. The fact that the Government bonus is only available at the point of completion does not assist first time buyers in the same way as it simply makes an insignificant reduction to the amount of finance they need to obtain which can be repaid, usually over a considerable length of time.

Here at Jacksons we have a large, and experienced, Residential Conveyancing Team based both in our Teesside and Newcastle office. We understand that first time buyers taking their first step on the property ladder are making a huge investment, in a lot of instances using their live savings to do so, and that buying a house can be an incredibly stressful experience. We are here to guide you through the conveyancing process each step of the way and aim to make your purchase as stress-free as possible. We strive to provide you with as much information as possible so that you are fully informed of your transaction from initial instruction through to completion. From our experience we know that many first time buyers are using funds from a Help to Buy ISA towards their purchase. If instructed, it would be our responsibility to deal with your Help to Buy ISA and claim the Government bonus on your behalf. We appreciate that you may have questions as to how this process works and, as is our aim to keep you fully informed, have produced the following guidance on how we claim your Help to Buy ISA bonus. The below note details not only what we have to do to claim your bonus, but also what we require from you in order to enable us to do so.

How can Jacksons help me? 

  1. Establishing whether you have a Help to Buy ISA – at the point of instruction, we will send you a Purchase Questionnaire which asks whether you will be purchasing with the assistance of a Help to Buy ISA. This is the first indication we will have that you are using a Help to Buy ISA and your file will be marked accordingly so that it is immediately clear that a bonus will have to be applied for.
  2. Closing your Help to Buy ISA – when the transaction is close to completion or when a firm completion date has been agreed, we will ask you to inform your ISA provider to close your Help to Buy ISA account. We aim to close the account as close to completion as possible to ensure you get the maximum bonus possible. It is imperative that you do not simply withdraw the funds in your account as this will result in you not receiving the bonus element. You are entitled to close your account at any time and should be provided with Closing Documentation within seven business days of your request to close the account. You should be provided with a Closing Letter on your ISA providers’ letterhead which will confirm that your account has been closed and will advise that you must provide the Closing Letter to your conveyancer in order for us to claim the bonus.
  3. First Time Buyer Declaration – at the same time as advising you to close your account, we will also send you a First Time Buyer Declaration to complete, sign and return to us with the Closing Letter once obtained.
  4. Requesting your Bonus Payment – we are only able to apply for the bonus once you have provided us with your Closing Documentation and First Time Buyer Declaration and therefore it is crucial that these documents are returned to us as soon as possible. Once in receipt of these documents we will be able to make the application for the bonus on your behalf. We are required to calculate the bonus amount that you are entitled to claim on the basis that you will be entitled to a bonus of 25% of the Closing Balance of the ISA subject to a minimum bonus of £400 and a maximum bonus of £3,000. As part of this process we are required to complete details with regards to your purchase including uploading a copy of your Closing Letter and First Time Buyer Declaration.
  5. Confirmation as to whether your application is successful – once we have made the application for your bonus, this will be processed by the administrator who will check the information provided and establish whether you are entitled to a bonus, and, if so, determine the amount of that bonus. We will then receive either a Bonus Approval Notification if your application has been successful, or a Bonus Rejection Notification in the event your application is unsuccessful.
  6. Payment of the Bonus – subject to your application being approved, we will then be able to submit a payment request via the online portal. Once this has been validated by the administrator the bonus will be sent to our client account within 5 business days. It is important to bear in the mind that the whole process can take up to twelve working days from closing your account to receipt of the bonus payment.
  7. Costs for Bonus Application Work – in respect of our services for calculating your bonus entitlement, submitting the application for your bonus and making a payment request, our fee is £50 plus VAT per Help to Buy ISA. If you are a first time buyer looking to instruct solicitors on your purchase, we have an experienced team who deal with the purchase of residential properties and new build purchases. We also have experience in dealing with Help to Buy ISAs and know how to request the bonus on your behalf. We carry out work on a fixed fee basis and will be happy to provide you with a quote which can be obtained via our website (https://www.jacksons-law.com/residential-coveyancing-quote/), by contacting any member of the Residential Conveyancing Team on 01642 356567 or by email residentialconveyancing@jacksons-law.com.

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