One in six aspiring homeowners have been forced to borrow money after discovering they can't put the government bonus towards their deposit, according to research.

Confusion over the way the Help to Buy ISA works has led to almost 50,000 first-time buyers delaying the purchase of a property, according to research.

The tax-free saving scheme, under which people receive a government bonus of 25% on the amount they have saved up to a maximum of £3,000, was designed to help those not on the property ladder put together a deposit.

But the government bonus is not paid out until a sale has been completed, meaning it cannot be used as a down payment. 

The situation has led to an estimated 45,000 property purchases being delayed, while around 29,000 people have ended up having to borrow money to cover the shortfall, according to financial services provider OneFamily.

Nici Audhlam-Gardiner, managing director of lifetime ISAs at OneFamily, said: “If you are hoping to buy your first property then you need to avoid the Help to Buy ISA if you are planning to use the bonus towards your initial deposit.”

Why is this happening?

The main issue with the Help to Buy ISA is that the bonus is not paid until after a property sale has been completed.

As a result, people cannot put the government bonus towards a deposit on a property, although they can still use the money they have saved themselves.

Confusion over when the bonus is paid has led to one in four first-time buyers saying they think the scheme is unhelpful and misleading.

Above: Two-bedroom flat for sale in London's Walthamstow

Who does it affect?

Around 1.2 million Help to Buy ISAs have been opened since the scheme was first launched in 2016, but only 196,000 have so far been used to purchase a property.

OneFamily’s research found that 15% of savers said they had not been able to use the money they had saved through the scheme to buy a home.

A further one in four first-time buyers said the timing of the bonus payment had delayed their purchase as they suddenly discovered they had a hole in their finances, while 15% ended up having to borrow money from family or friends to make up the shortfall.

OneFamily said thousands of other first-time buyers could also potentially be caught out by the issue, with 69% of people planning to buy their first home in the next three years mistakenly thinking all of the money could be used towards a deposit.

What’s the background?

The research uncovered a generally low understanding of how the Help to Buy ISA works.

Two out of five people wrongly thought they could put the money towards any property they wanted to buy, when in reality it can only be used on homes worth up to £250,000, rising to £450,000 in London, that are being purchased with a mortgage.

A further 61% were confused about the limits on the scheme, not knowing if the Help to Buy ISA or Lifetime ISA enabled them to save more.

The Lifetime ISA was introduced in 2017, and also offers a 25% government bonus of up to £1,000 a year.

But it appears that many first-time buyers are failing to take advantage of the scheme, with 55% admitting they had never heard of it.

Top 3 takeaways

  • Confusion over the way the Help to Buy ISA works has led to 45,000 property purchases being delayed, claims OneFamily
  • The government bonus savers receive under the scheme is not paid out until a sale has been completed, meaning it cannot be used as a down payment
  • The situation has also led to one in six first-time buyers having to borrow money to cover the shortfall

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