In recent years, the government has introduced a range of new Individual Savings Accounts (ISAs) to help first time buyers like you. This article will help you figure out which ISA is right for you.
Which is the best ISA for First Time Buyers?
This is a tricky question, but the ISAs that are geared to help first time buyers is the Lifetime ISA. You can of course also use a Cash ISA or a Stocks & Shares ISA to save for your mortgage deposit, but they won’t offer any additional benefits, unlike the Lifetime ISA, towards your property purchase as a first time buyer.
Why is a Lifetime ISA best for a first time home buyer?
Compared to the other ISAs, a Lifetime ISA (LISA) will give you an extra bonus boost to your savings balance, that can be used for your first home purchase. For every £1 that you save in the LISA, the goverment will top up another 25%, so you get £1.25!
If you want to find out more information about Lifetime ISAs, we have a Guide to Lifetime ISAs for First Time Buyers.
Can I use a Cash ISA for a home purchase?
Yes, you can. But there is no extra bonus top-up from the government. Most first time home buyers, however, would have both Lifetime ISAs as well as Cash ISAs, because you can only save up to £4000 a year in a Lifetime ISA, whereas you can save up to £20,000 a year in a Cash ISA. You can always use your Cash ISA money for your house deposit, although make sure you don’t put your money in a fixed savings ISA account (like a 1 year fixed savings cash ISA) if you’re looking to buy your first home within the next year, and need to access that money.
Can I use a Stocks & Shares ISA to save for my house deposit?
Like the Cash ISA, you can keep your mortgage deposit money in a Stocks & Shares ISA while you’re still saving up or viewing properties to buy.
As part of a diversified financial strategy, having your savings in a S&S ISA might be a good strategy to build up your deposit, as investments in shares may give you more returns in the form of capital appreciation and dividends than interest in a cash ISA account. However, it is more risky than a cash ISA, as you could lose your money when investing in shares.
When you’ve decided to purchase your first home and are actively looking to buy, you want to know exactly how much money you have for the mortgage deposit. If you have shares in your Stocks & Share ISA, it can be a good move to sell your shares and convert to cash, so you know exactly how much money you have for your home deposit.
Regardless of which ISA you choose, there are several things to bear in mind. The first is that the ISA is an incredibly tax efficient solution. No income tax or capital gains tax to pay on anything you earn from your investment within! So you should definitely maximise them, whether you’re saving for your first home purchase, a big item like a car, or for retirement.
There is a maximum of £20,000 a year you can put into any ISA or a combination of ISAs. So you could put £4,000 a year into a Lifetime ISA, and £16,000 into a Cash ISA, every tax year.
The tax year always starts on the 6th April, and ends on the 5th April. In 2020 for example, the tax year started on the 6th April 2020. At the start of every tax year, the £20,000 ISA allowance you get is reset. You lose whatever you haven’t used from last year’s allowance, it cannot be carried forwards. So make sure you put a reminder in your calendar about the tax year end date, so you can ensure you don’t miss out on your allowances.
Ready to create your Lifetime ISA? You can read more at FTB.help on common Lifetime ISA FAQs for First Time Buyers.
Also check out the other popular government support for First Time Buyers: Help to Buy Equity Loans.
