The Help to Buy Isa has delayed 45,000 property sales and misled account holders as to the terms under which the funds can be used, according to research pooled by OneFamily.
The provider found 25 per cent of first-time buyers believed the product was "misleading and unhelpful" as savers were unaware the government bonus could not be used towards a deposit.
This had led to 15 per cent having to borrow money from family and friends to fund the initial down payment.
As a result, OneFamily said a mere 196,000 savers used the money saved in their Isa to buy a property and 23 per cent of these purchases were delayed as a result of the confusion surrounding the deposit funds.
Latest government figures showed 1.2 million savers have opened a Help to Buy Isa since the scheme’s introduction in December 2015.
The scheme offers a 25 per cent government bonus to a maximum value of £3,000 on money saved but the additional funds can only be released at completion of the property transaction.
OneFamily surveyed 789 homeowners and 250 people who are considering buying their first house in the next three years, between 8 August and 16 September.
The provider predicted a continuing trend, with 69 per cent of those intending to purchase their first home believing the money saved in the Isa could still be used towards a deposit.
What's more, the Help to Buy Isa can be used to purchase a property up to the value of £250,000, or £450,000 in London, but OneFamily found 41 per cent of potential first-time buyers believed the Isa could be used towards any mortgage.
Nici Audhlam-Gardiner, managing director of Lifetime Isas at OneFamily, said first-time buyers should avoid the Help to Buy Isa if they require the bonus towards an initial deposit.
She said: "The average deposit for a first-time buyer is now more than £30,000 so it is harder than ever to save up for a home, and for many people is by far the biggest hurdle.
"The Lifetime Isa (Lisa), introduced last year, is far better for first-time buyers as not only do savers make more in government bonuses, they can actually use it towards the deposit."
The Lisa was introduced in 2017 and offers a government bonus of 25 per cent, up to £1,000 a year, which can be claimed before a property purchase.
Ms Audhlam-Gardiner 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 of first-time buyers remain unaware of the Lisa.
"We are urging the government to reiterate its closure plans and further support the Lisa and help the thousands of people who are desperate to get on the ladder."
In August, HM Revenue & Customs published figures showing Lisa sales had failed to live up to government expectations, adding further fuel to the Treasury committee's calls earlier this year for the scheme to be abolished.