Help to Buy Isa: how the bonus payment really worksDon't panic - you can still put it towards buying your first home
27 August 2016
You might have read stories earlier this week about a Help to Buy Isa 'scandal' that threatens to lock half a million people out of home ownership. Here, we separate the facts from the fiction.
There have been suggestions in the last few days that first-time buyers can't use their Help to Buy Isa bonus payment as part of their house deposit.
This isn't quite right. You can still put your bonus towards your deposit, and it'll still be factored into your mortgage application.
The debate is actually about something called an exchange deposit, which is paid prior to completion. Find out more below.
- Are you buying soon and on the hunt for a trustworthy solicitor? Which? has teamed up with a conveyancing partner to offer a no-move, no-fee service. Find out more and get a no-obligation quote from Which? Conveyancing
What is an exchange deposit?
When you're buying a home, the first point at which things become legally binding is when you exchange contracts with the seller. At this point you'll usually need to pay a deposit of 10% of the purchase price. This is called an exchange deposit and is designed to offer a guarantee to the seller that you will complete the deal.
You can put your Help to Buy Isa savings towards the exchange deposit but the government bonus doesn't get paid until completion (which typically happens two weeks after exchange).
David Parton, partner at national law firm Shoosmiths, says: 'The Help to Buy Isa bonus can only be used as part of the final completion monies; it cannot form part of the exchange deposit. In reality, the end result at completion is much the same, in that the government will add 25% of the money saved up to a maximum of £3,000 towards the purchase price.'
It's also worth noting that you'll only be able to use your bonus towards the cost of buying the house - it can't be used for any other charges such as stamp duty, conveyancing fees or house surveys.
If you were planning to put the bonus towards your exchange deposit, don't worry - there is a solution.
What to do if you need the bonus to pay your exchange deposit
While the exchange deposit is usually 10%, this isn't legally binding. If you tell your conveyancer or solicitor right from the start that you'll be relying on Help to Buy Isa bonus cash as part of your payment, they should be able to negotiate the exchange deposit down to 5%.
This rarely causes a problem because, while this payment provides reassurance to the seller, they won't actually receive the money until you complete (it's simply a transfer of cash between your solicitor and theirs) - plus you'll have already proven that you can afford to buy the property.
Buyers taking out a 95% mortgage will only be expected to pay an exchange deposit of 5%. If this applies to you and you were relying on the government bonus to form part of your 5% deposit, again, talk to your solicitor as soon as possible and they will advise you on your options.
Is it still worth opening a Help to Buy Isa?
In a word, yes. As well as offering better interest rates than most savings accounts (today's best nationally available rate on Which? Money Compare is 2.50% with Virgin Money), the government gives you a bonus of up to £3,000 when you buy your first home, provided you meet certain criteria.
Rather than diminishing your buying power, a Help to Buy Isa boosts it, as mortgage lenders will take the bonus payment into account when assessing your affordability.
The most important thing to do, especially if you're worried that you'll need the bonus for your exchange deposit, is to work out your finances as early as possible and be up front about the situation with your solicitor.
- Find out more about how Help to Buy Isas work
How does the Help to Buy Isa bonus get paid?
Once you're ready to buy a home, these are the steps you'll need to follow to claim your Help to Buy Isa bonus:
- Your and the seller's solicitors agree a date for completion.
- You close your Help to Buy Isa and provide your solicitor with the closing documents.
- Your solicitor submits your bonus request and receives confirmation of how much you're entitled to.
- You receive a completion statement for the property which shows how much you'll need to pay, with the bonus already deducted as it gets paid to your solicitor rather than you.
If you're saving up for your first home, you can get personalised, impartial advice on all things mortgages by calling Which? Mortgage Advisers on 0808 252 7987.
Help to Buy Isa: the basics
- The Help to Buy Isa is designed to help people saving to buy their first home, so if you've bought a home previously you can't open one.
- You can open the account with an initial deposit of up to £1,000 and can then top up your savings by up to £200 each month.
- The government will provide a bonus of 25% on your Help to Buy Isa savings when you buy a house (up to a maximum bonus of £3,000).
- You can use your savings to buy a house priced up to £250,000, or £450,000 in London.
Find out more in our quick video, and for the full details check out our Help to Buy Isa guide.
- Lifetime Isa - the new savings account for first-time buyers and retirement savers launches in April 2017
- Help to Buy - get a helping hand onto the property ladder with one of these government schemes
- What is a mortgage? - learn the basics about how mortgages work
This article was amended on 30 August to clarify what the government bonus can and cannot be spent on. The bonus cannot be put towards stamp duty, legal fees or any other costs associated with buying a property, and can only be used as part of the deposit on the property itself.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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