First-time buyers are getting into debt due Help to Buy Isa bonus catch – here’s how to avoid it
One in six first-time buyers end up borrowing money from friends and family to cover the deposit gap which should have been boosted by their Isa
A YOUNG couple from Leicestershire were left with over £5,000 of debts after falling foul of a loop hole which meant they couldn't use the Help To Buy Isa top-up to pay for their house deposit.
Laura Hollick, 27, and Jamie Ray, 23, were relying on the £3,000 government top-up on their savings to secure their new-build house but they were never able to claim it.
They are one of 45,000 first-time buyers who's house purchase has been delayed because they couldn't use the Help to Buy top up for a house deposit, according to financial services firm OneFamily.
When you buy a property there are usually two deposits - one chunk is paid when you exchange contracts, called the exchange deposit, and the other is a mortgage deposit.
The Help to Buy Isa bonus is only paid when the sale is completed.
In Jamie and Laura's case, the building firm wanted the whole deposit up-front for when they exchanged and as they'd been relying on the bonus from their Help to Buy Isa for the cash they were left short.
Research by OneFamily has found that one in six first-time buyers end up borrowing money from friends and family to cover the deposit gap which should have been boosted by their Isa.
They are reminding savers to keep a chunk of cash aside in an alternative account to help avoid this situation.
Laura and Jamie, who are both secondary school teachers, felt they were left with no choice but to borrow the extra funds needed for the 5 per cent deposit from their parents or risk losing their dream home.
They had planned to save the maximum £400 a month across the two accounts, which would have brought their savings up to £12,000 in total - meaning the government would have boosted it by £3,000.
How to avoid getting caught out
HERE'S how to make sure that you're getting the most out of your Help to Buy Isa:
- Compare the best rates - Before opening an account, shop around for one with the best interest rates.
- Play the long game - To get the maximum £3,000 bonus, you'll need to put in £12,000 of your own money - which will bring your savings up to £15,000. If you open the accounts with the maximum £1,200 and topped it up with the limited £200 a month then it will take you four and a half years. Open an account now, even if you're not thinking about buying a house.
- Switch - You can switch your provider whenever you like so keep an eye out for better rates that you can swap to.
But after a few months of saving, the builders asked the couple for the full £9,250 deposit upfront.
They ended up withdrawing the £1,600 they'd saved between them from their Isas and benefiting from a measly £400 top up.
It meant that when they finally moved into their three-bed new-build, which they bought for £185,000, they were still living on a tight budget while they paid their parents back.
With no cash to spare, they were left relying on credit cards to cover any unexpected payments, like replacing two car tyres, amounting to around £2,000 in total over 18 months.
"By the time we moved in, we were crippled," Laura told The Sun. "We had no idea we couldn't use our Help to Buy Isa top up for the deposit.
"We were saving while we rented a tiny two-bed flat in Rutland and got caught out by the Isa because we thought we'd be able to make the most of our account.
How to cut the cost of your debt
IF you're in large amounts of debt it can be really worrying. Here are some tips from Citizens Advice on how you can take action.
Check your bank balance on a regular basis - knowing your spending patterns is the first step to managing your money
Work out your budget - by writing down your income and taking away your essential bills such as food and transport
If you have money left over, plan in advance what else you’ll spend or save. If you don’t, look at ways to cut your costs
Pay off more than the minimum - If you’ve got credit card debts aim to pay off more than the minimum amount on your credit card each month to bring down your bill quicker
Pay your most expensive credit card sooner - If you have more than one credit card and can’t pay them off in full each month, prioritise the most expensive card (the one with the highest interest rate)
Prioritise your debts - If you’ve got several debts and you can’t afford to pay them all it’s important to prioritise them
Your rent, mortgage, council tax and energy bills should be paid first because the consequences can be more serious if you don't pay
Get advice - If you’re struggling to pay your debts month after month it’s important you get advice as soon as possible, before they build up even further
Groups like Citizens Advice and Money Advice Trust can help you prioritise and negotiate with your creditors to offer you more affordable repayment plans
"We'd been planning on moving in with a spare £3,000 to put towards furniture but instead we were using all of our spare cash to pay off our parents.
"Finally owning your own home is supposed to make things calmer but it's actually been far more stressful for us.
"It took us 14 months to pay our parents back and we're still paying of the credit cards, but we're nearly there now."
They're not the only ones to fall foul of the loop hole. A survey of 1,039 first-time buyers by OneFamily found that one in six weren't able to use the top up for their deposit.
And the finance firm warns that 69 per cent of fist-time buyers planning on buying a home in the next three years aren't aware of the pitfalls.
Nici Audhlam-Gardiner, from OneFamily, said: "We support the closure of the Help to Buy ISA next year as it is not fit for purpose and is actually delaying property sales, however our research shows that the majority (55 per cent) of first-time buyers remain unaware of the Lifetime ISA.
"We are urging the government to reiterate its closure plans and further support the Lifetime ISA and help the thousands of people who are desperate to get on the ladder."
MORE FOR FIRST-TIME BUYERS
Struggling to get on the property ladder? One Brit couple Ryan and Kiera Crabbe have moved 800 miles from London to Spain to help save up for a deposit on a one-bed flat because it is cheaper than renting in the capital.
In June, an estate agent estimated that single first-time buyers need over a decade to save up for a deposit - and it could take Londoners up to 17 years.
Are you a first-time buyer who's bought their own home? Why not take part in our My First Home series.
Lifetime ISAs: Need to know
A LIFE time Isa is an alternative to a Help To Buy scheme which can be used for your first home, for later life or retirement. But there are a few catches:
- You can pay in a maximum of £4,000 every year and earn a top-up from the Government of £1,000.
- The maximum bonus you could earn is £33,000 if you save until you are 50.
- Once you turn 50 you can no longer pay into your Lifetime ISA but your savings will still earn interest.
- You can only acess your money to buy your first home or when you reach 60, otherwise there's a penalty.
- Any money you take out before you are 60 will be hit with a 25 per cent charge.
- When you're 60 you can withdraw the money from your Lifetime ISA tax-free.
- Skipton Building Society is the only provider currently offering a cash Lifetime ISA.
- If you are willing to take investment risk, there are many providers offering the stocks and shares version including Nutmeg, Hargreaves Lansdown, The Share Centre, Moneybox, AJ Bell, OneFamily.
- Unless you are self-employed AND a basic rate tax payer, a pension is likely to be a better option for retirement saving than a Lifetime Isa because of the tax-breaks and the contribution from your employer.
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