Help to Buy ISAs - Destined to fail the first time buyer

There is  a great deal of buzz surrounding the Government backed Help to Buy ISA Scheme ( available since the 1^st December 2015)  and in this article I look to explore the 'ins and outs' of the scheme as well as assessing whether it is likely to be successful.

How does it work?

You open an ISA account and the Government will top up your savings by 25% according to how much you add to the account.

You can add in the first month £1200 but there after you can only add a maximum of £200 per month.  You will only be entitled to the Government bonus once you have accumulated £1600.

The maximum amount you can save in a Help to Buy ISA is £12,000.

So the minimum Government bonus is £400 ( once you have reached the minimum amount ) and £3,000 if you accumulate the full 12,000 ( which will take around four and half years).

Help to Buy ISAs are available to each first-time buyer, not each house, so if you’re buying a property with your partner, for example, you’ll be able to get up to £6,000 towards your deposit.

Your Government bonus will go straight to the mortgage lender. It doesn’t sit in your account, it earns no interest, and you only get it if you buy a home. If you don’t decide to buy a home nothing apart from the bonus is lost since you can still subject to notice requirements of the supplier of the ISA, withdraw the savings.

Who qualifies ?

You need to be a first-time buyer and must be aged 16 or over.

It can be used to buy any home worth under £250,000 (or under £450,000 in London). It will not be available to those who wish to buy a property to let or an overseas property.

You can use a Help to Buy ISA with any mortgage.

The scheme is limited to one Help to Buy ISA and you can’t open a Help to Buy ISA and a normal Cash ISA in the same tax year.

The ISA will only be available to open until 30^th November, 2019 but if f you opened your Help to Buy ISA before then you can keep saving into your account. You must claim your bonus by 1 December 2030.

Does the Help to Buyer ISA represent a good deal?

According to The Money Advice Scheme it is:

 ‘…………..a no-brainer if you’re a first-time buyer saving for a mortgage deposit. You can earn up to 4% interest tax-free and then the state will add 25% free cash, and it could be £1,000s, on top of what you save’

So what are the drawbacks?

In truth there are not many.

If you are looking to purchase now or within the immediate future before house prices begin to accelerate further Help to Buy ISA  is not really going to make a big difference. If you were to start an account now and run with the £1200 initial deposit you could be eligible for the tax free bonus of £400 within 3 months of opening the account.

The bonus cannot be used to pay other costs, such as legal fees. It can only be used towards the purchase price.

You may find it difficult to find a conveyancer who is prepared to handle the conveyancing of a property which is funded in part by your ISA savings and the government bonus.  This is because the government as you will see below has limited the fee a conveyancer can charge for the extra work to £50 plus VAT.   Some conveyancers may take the view that the fee is unlikely to cover the actual work involved and decide not to take this work on.

What is the role of the conveyancer?

The solicitor or conveyancer will make the application for the bonus on behalf of the client, confirm that the client has declared their eligibility to receive the bonus and confirm that the property being purchased meets the eligibility criteria. This involves submitting the relevant documentation, including a payment request, and, once received, applying the bonus funds towards the purchase of the property.

Solicitors and conveyancers may charge the client up to £50 plus VAT to fulfil their role as part of the scheme.

To be able to act for clients the conveyancer must register with the Scheme.  This involves an application and vetting process which is to be handled by a third party – Lender Exchange.

Once registered the conveyancer for his or her £50 will be required to do the following.

Firstly to make the bonus application on behalf of the client, and confirm that the client  has declared their eligibility and the property being purchased meets the eligibility criteria.

This involves sending an application for the bonus to the Administrator, submitting the relevant documentation to the Administrator, submitting a payment request following approval, and holding the bonus to apply to the purchase of the property.

The conveyancer is also required to verify that the client is acquiring an eligible interest in land, that the acquisition is funded by a non-buy-to-let mortgage (unless exceptions apply) and that the value of the property is up to £250,000 or £450,000 depending on the location of that property. 

If the conveyancer has reason to believe that the client  is not eligible for a bonus, he or she should not proceed with the bonus application.

It is said the process will be simple and straightforward. Only time will tell.

Some questions

A cash free bonus can only, on the surface, represent a good deal for a first time buyer,though limiting the amount of the monthly contribution and delaying for four and half years the opportunity to purchase a property with the full bonus, must beg the question whether the benefit  of the bonus will be lost given the current rate of house inflation.

On the same note and given the figures are not house price index linked how many properties with a property tag of £250,000 and less will be available in four and half years’ time?

Applying an arbitrary cap to the extra-legal fee a conveyancer can charge, without any apparent engagement with the industry and regard to the amount of extra work involved, is unlikely to win favours and could lead to clients finding it difficult to find a conveyancer willing to assist with a purchase.

Conclusion

This may appeal in main to parents who are keen to find a tax free vehicle for assisting their children with their savings to be used towards the purchase of a property in the future.

I question however whether it will have wider appeal and indeed value unless the bonus is linked to the  House Price Index and the Government does something soon about making more affordable homes available for first time buyers.

As for what can only be described as a token payment to the conveyancer, it is clear once again  the conveyancer has been chosen as easy prey to subside the administration of the scheme, especially when you consider how much £50 plus VAT will be ‘worth’  in 2019/20 when, if successful, the system will kick in.

At present this represents nothing other than a political murmur falling well short of what is actually required to provide real help to the first time buyer.

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com

Beware of the Help to Buy Scheme

The Help to Buy shared equity scheme designed to get people onto the housing ladder has its benefits but those who may be enticed by developers to make use of the ‘leg up’ must exercise some caution.

There are clearly signs that the property market is recovering, with the Royal Institution of Chartered Surveyors reporting that demand rose to its highest level for more than three years after the April launch of Help to Buy. New buyer inquiries were at their highest level for more than three years, and the scheme was starting to make an impact, the institute said.

However some of the methods developers are using to market their properties to first-time buyers who might be eligible for the Help to Buy shared-equity programme are being called into question.

What is the Scheme?

Under the scheme, which is expected to trigger 74,000 sales, the taxpayer provides an interest-free loan of 20pc of the purchase price for five years, to enable a borrower to buy a newly built property. Home buyers still need a 5pc deposit, but this additional loan should enable them to buy a property they couldn't otherwise afford. Help to Buy mortgages can be used on properties valued up to £600,000.

Participating mortgage companies will then grant an advance of the remaining 75pc of the value. After five years, the homeowner has to pay interest on the outstanding 20pc at a rate of 1.75pc, although this will rise by inflation plus 1pc annually thereafter.

However, it has been reported that developers are marketing their properties at prices 20pc below the correct asking price, implying that the equity loan is a discount or free gift.

A property for sale by a certain large developer, for example, priced at £439,500, was also advertised separately at £351,600 – indicating that the property was cheaper than it actually was.

Slicing money off the price implies it is a gift from the Government. It is not. An equity loan is precisely what it says it is. It is a loan that has to be repaid. This may encourage people to take on debt, which is not understood, or to overstretch themselves and buy properties bigger than they can afford.

New homes tend to be more expensive. According to the latest report from Halifax, the average cost of a newbuild home is £233,822. This compares with the average property price of £166,000 in April.

Indeed, a large section of the mortgage market has turned its back on the new shared-equity scheme. Only Halifax and NatWest, both part-owned by the Government, have embraced the scheme enthusiastically, although Woolwich is also offering Help to Buy loans.

So what are the pitfalls of this scheme?

·    You can participate only if you do not own any other property.

·   If you want to buy the Government out, you can do so, but there will be costs. You can increase your equity, but only in 5pc slices. Each time the property must have an independent valuation, which you will have to pay for.

·    You may also face problems if you want to extend or alter the building, as you have to seek approval, which may not be forthcoming. Increasing the value of the property through a large extension can make subsequent equity valuations problematic.

Advice

·     Buying a new property means you will be invariably be paying more for the property than the equivalent second hand property so make sure you look to negotiate the price down.

·    Look to work out how much you will paying under the scheme and the mortgage in 5 years time – will you be able to afford it.

·     Don’t be drawn in by misleading sales talk.

·     Remember it will  be expensive to increase your equity in the property.

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk