Over the weekend the Telegraph reported that there is a Help to Buy ISA “scandal” because “first-time buyers will not be able to use it on an initial deposit on their new home”. As you’d expect, this prompted an angry reaction from some of the 500,000 people who’ve taken out an ISA in the hope of using the government’s bonus towards their deposit. But is this all as scandalous as it sounds?
The Help to Buy ISA
The Help to Buy ISA is a savings product launched in December 2015 which combines a traditional tax-free ISA from a bank or building society with a 25% government bonus. The key idea is that when you pay into the ISA, the government also pays in: up to a limit. That limit is £3,000 per person which is reached once you have saved £12,000. The government bonus builds up gradually, with a limit of £50 (for £200 savings) per month, meaning that you don’t qualify for the full bonus unless you’re saving regularly over a long period of time. The Help to Buy ISA can be used on homes selling for up to £250,000 outside of London and £450,000 inside London.
The deposit problem
The scandal highlighted by the Telegraph has always been a feature of the ISA, but only brought to attention now as the first account holders move into their new homes. You can only access the government bonus (up to £3,000 per person) once the mortgage has been completed. Completion is the final stage of the house buying process and comes after you’ve already put down your exchange deposit (usually 10% of the value) and paid legal fees, survey costs and other expenses.
However, unlike how it has been reported, this does not affect your ‘deposit’ in the sense of your Loan to Value (LTV) ratio – or how big your mortgage is relative to the price of the house. That’s because the extra government bonus from the Help to Buy ISA can be used to reduce the size of your LTV once a purchase is completed as it can be used to give you more equity in the home. The deposit affected is the ‘exchange deposit’ held between exchange and completion to prevent you from pulling out of the sale. The reason that the government won’t pay out before that point is to make sure the money is used for buying a home – to prevent, for example, someone pretending they are buying a home to access the bonus.
People who can access a “bridging loan” will be able to use the government bonus for the exchange deposit and in many cases it may also be possible to negotiate on the size of the exchange deposit to take account of the Help to Buy ISA, according to experts quoted in the FT. The ‘scandal’ disappears when you scratch the surface.
The real scandal
The deposit problem has made a lot of people angry. However the bigger problem is that most renters can’t save much at all, let alone enough to keep up with house prices or to access the government’s Help to Buy ISA bonus once they’ve bought a home.
As I wrote recently, the evidence shows that half of private renters who want to buy a home are unable to save anything at all each month once their rent and other bills are paid. A further 16% can’t save any more than £50 per month.
If you save £50 per month or less (as most renters do) then it would be 20 years or more before you could access the full government bonus on the Help to Buy. By then, prices would in all likelihood have increased far more than the value of the ISA.
Chart: Saving with a Help to Buy ISA versus house prices
If we want to help people who can’t buy homes to be able to do so – rather than just speeding up the process for people who would buy anyway – then we have to provide homes with low rents and longer term contracts to help people save. We also need policies which stabilise prices over the long term so that incomes can catch up.
People can’t save (or indeed live happily) if most of the income each month goes on their rent. That’s the real scandal.
*Calculation on what renters can save:
- Shelter research has shown that 48% of private renters can afford to save nothing towards a deposit, while an additional 16% can only save £50 or less.
- 64% of private renters can therefore save £50 or less.
- If you save £50 per month in a Help to Buy ISA, with an interest rate of 4% and a government bonus of 25% then you will save £780 in a year.