The government’s Help to Buy ISA has come under fire following claims that first-time buyers may not be able to use it as part of their deposit. However, there are solutions, as Graham Ireland explains.
The Help to Buy ISA scare – and its remedy
Shock waves hit the first-time buyer market after allegations of serious problems with the Help to Buy ISA scheme that offers savers a cash bonus of up to £3,000.
Media reports highlighted a flaw in the rules that mean the 25 per cent government bonus on savings can not be paid until a purchase completes, leading to fears of potential funding gaps.
However, there are effective ways round the issue and specialist lawyers at WHN Solicitors can help to guide buyers through this complicated legal landscape.
What are Help to Buy ISAs?
The Help to Buy ISA is designed to help people saving to buy their first home. Accounts can be opened with an initial deposit of up to £1,200 and you can then add to your savings by up to £200 a month.
Then, when you are ready to buy your house, the government provides a bonus totaling 25 per cent of your savings, up to a maximum of £3,000. Savings can be used to purchase a house costing up to £250,000 or £450,000 in London.
Exchange deposits and how they work
The funding gap issue does not relate to your total contribution towards the purchase price of the property, but rather to the ‘exchange deposit’ – typically ten per cent of the purchase price – that is paid to the seller’s solicitors on exchange of contracts ahead of completion as a form of guarantee.
According to the rules, a Help to Buy ISA bonus can only be used as part of the final completion funds – not part of the exchange deposit. In fact, the bonus will not be available at the time of exchange of contracts.
However, specialist solicitors at WHN recognised this issue some time ago and has successfully helped a number of first time buyers with house purchases where they have used a Help to Buy ISA. It is important, though, to let your solicitor know as soon as possible if you are relying on a Help to Buy ISA cash bonus as part of your payment to avoid delays.
How you can use the ISA bonus for your exchange deposit
Although the exchange deposit is usually 10 per cent, there is no legal reason why it must be set at this figure.
We can negotiate the exchange deposit below ten per cent – contracts can be exchanged without payment of a deposit at all, although the seller’s agreement would have to be obtained for this to happen or, more typically, the deposit can be as low as five per cent.
It is agreed that the remaining money (the Help to Buy ISA bonus) will be paid on completion. This is possible because the cash bonus is released after exchange of contracts.
This is how the process works: After agreeing a completion date, you close your Help to Buy ISA and provide us with the relevant documents. We then submit your bonus request and confirm the amount you will receive. Finally, you are sent a completion statement showing how much you need to pay, with the bonus already subtracted as it will be paid to us, rather than you.
However, the procedure can be technically challenging and requires legal expertise, so you should speak to your solicitor at the outset.
For further advice on Help to Buy ISAs, call Graham Ireland on 01254 272640 or email him at Graham.Ireland@whnsolicitors.co.uk