More than 55,000 buyers have been caught out by a flaw in the Help to Buy ISA that prevents savers from using their bonus as part of their exchange deposit, new figures show.
And 51% of those affected were forced to borrow money from loved ones to complete their property purchase – at an average of £1,400 each.
The figures come as Government data shows 1,000 completions took place a week last year through the scheme, which was introduced in 2015 to help get buyers onto the property ladder.
The Help to Buy ISA allows you to save up to £200 a month into an account - plus a £1,200 lump sum on opening.
Savers then get a 25% bonus on top of what they save when they decide to buy a house.
However, unlike the Lifetime ISA , the 'bonus' is not paid into your account each year. To claim it, your solicitor will have to apply for it after you've exchanged contracts (ie only after there's paperwork to show a sale is going through).
The problem is, almost all buyers demand money at the point of exchange as a show of good faith - and that means if your money is in a Help to Buy ISA, there's no way to use the savings bonus as part of that exchange deposit.
This confusion - where money meant to help you buy a home can't be used as part of the exchange deposit to buy it - is putting some purchases at risk.
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To complicate matters further, while completion usually happens around 10 days after exchange, it could take weeks for the money to be released from your Help to Buy ISA - meaning you have to apply as soon as possible.
A Freedom of Information request by financial services provider OneFamily said close to 55,000 first-time buyers have been caught out by confusion around 'exchange' and 'completion' rules since the scheme was introduced in 2015 - leaving them borrowing cash to complete their sale.
On average, those who were caught out had to borrow £1,400 from friends and family at short notice – a total of £38.9 million since the ISA was introduced - the Freedom of Information request found.
They also faced an average wait of seven weeks after they arranged the loan.
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'It seemed like it could actually help us - at first'
Sarah Newick, 28, and her fiancé bought a shared ownership two bed flat in Tonbridge in 2016. Her solicitor applied for her bonus - however it came through two months later.
This meant she was unable to use the 'bonus' towards either the exchange or completion of her purchase.
"Our share was £68,000 and our deposit was £6,800. We saved for about a year but a large part of it was inheritance from my Dad after he passed away," Sarah explained.
"When the Help to Buy ISA first came out in 2015, we were really excited by the sound of it as it seemed like it could actually help us. You can get up to £3,000, which is pretty amazing but only if you have the ISA for five years – but we didn't want to wait that long as we'd already been saving on our own.
"We actually only ended up saving into it for a couple months as we found a flat with absolutely no chain that hadn't even been put on the market, so it was quite a quick process.
"Because we only had the account open for a few months, we weren't entitled to the full Government bonus, but it was around £500 or so which was still helpful and something we banked on for the deposit."
But Sarah, who has a two-year-old daughter, was then told by her solicitor that the money wouldn't kick in until completion. Worse, they were then told it would take two months to arrive.
"As we were so close to purchasing, we ended up having to borrow £800 from my fiancé's parents to complete the purchase. We were lucky because the solicitors were able to send us a cheque with the money after it had reached them.
"I think it took about two months for the money to be released. Our solicitor had to write a letter to the bank to specify that we were buying in order for them to release it.
"We didn't realise it would take so long for us to get the bonus, which definitely would have been helpful to be warned about before."
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More people to be caught out
The Help to Buy ISA is set to close to new customers on 30 November, but those who are currently saving will be able to continue to do so until 2030.
Currently, there are 960,800 active accounts, which means an additional 182,550 buyers could be caught out by the product flaw - and it could be more, as more would-be homeowners open the accounts over the next six months.
Two in five of those currently saving into a Help to Buy ISA are unaware that they cannot use the bonus towards their deposit on exchange, OneFamily figures show. A further 22% said they felt 'let down' by the scheme.
"The statistics for 2018 highlight a very successful year for Help to Buy, with the scheme having helped 1,000 households every week over the year to get on the property ladder," explained Kate Davies of the Intermediary Mortgage Lenders Association.
"With as many as one in every seven first-time buyers using Help to Buy in England in 2018, it is likely that the programme will remain invaluable in supporting home buyers over the remaining years of scheme, and will play a crucial role in helping to keep the housing market on an even keel during a period of heightened uncertainty as a result of Brexit ."
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However, Nici Audhlam-Gardiner, at OneFamily said the scheme has become a "hindrance" for first-time buyers.
"While it was intended to help first-time buyers, the Help to Buy ISA has turned out to be more of a hindrance for those who were hoping to put the government bonus towards their initial deposit.
"It’s not fit for purpose which is in part why it is closing to new customers from November. But many more first-time buyers could still be misled and open an account before this, adding to the thousands who are already at risk of being caught out.
"On average it takes 10 years to save for a deposit, over this time first-time buyers could benefit from a government bonus of £10,000 from a Lifetime ISA instead of the maximum £3,000 bonus available from the Help to Buy ISA – and savers can actually put it towards their deposit.
"But the £4,000 cap on transferring funds is keeping people trapped in a dud account, making it even harder for them to achieve their dreams of home ownership. We’re urging the Government to reiterate its support for the Lifetime ISA and remove the transfer cap – so that the funding available delivers the benefits that were intended."
So when can you use your Help to Buy ISA bonus?
While your Help to Buy savings can be used on exchange, the actual bonus cannot be used until completion.
What if I need the bonus to pay for my exchange deposit?
Most exchange deposits are around 10% of the property sale, however this isn't legally binding.
If you tell your conveyancer or solicitor from the get go that you’ll be paying using Help to Buy Isa bonus cash, they should be able to negotiate the exchange deposit down to 5%.
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, speak to your solicitor to go over your options.
