ISAs: how do they help first-time buyers save for a home?

ISAs: how do they help first-time buyers save for a home?

ISAs: how do they help first-time buyers save for a home?


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Are you daunted by the prospect of getting on the property ladder?

It goes without saying that the process of buying your first home is a financial challenge. But with lifetime ISAs, you could receive up to £1,000 each tax year towards your deposit.

Here’s everything you need to know. 

What’s an ISA?

Let’s start with the basics.

ISA stands for individual savings account. 

ISAs are savings or investment accounts that allow you to save money tax-free.

As the name suggests, they can only be held in one person’s name.

An ISA account limits the amount of money you can deposit in each tax year. The maximum amount is £20,000.

The tax year runs from 6 April to 5 April the following year. 

What types of ISAs are available?

There are several different types of ISA. 

The main ones are:

  • Cash ISAs
  • Stocks and shares ISAs
  • Innovative finance ISAs

Cash ISAs work in the same way as an ordinary savings account, but they are tax-free. 

Stocks and shares ISAs can be used for a vast range of investment products such as government bonds and unit trusts. 

Innovative finance ISAs allow you to make peer-to-peer lendinginvestments tax-free.

There are also junior ISAs for children. These are aimed at families to encourage them to save for a child’s future. 

The relatively new Lifetime ISA is designed for first-time buyers and those saving for retirement. It’s a type of cash ISA.

How much can you save with ISAs?

You can save up to £20,000 each tax year into an ISA. 

If you do not use this allowance within the current tax year, it cannot be carried over.

This allowance can be split between different types of ISA. But you can only pay into one of the same type of each ISA each tax year. 

With Lifetime ISAs the government pays you a 25% bonus on whatever you’ve managed to save. 

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You can only pay a maximum of £4,000 into a Lifetime ISA each tax year. If you do manage to save the full £4,000, you’ll receive a bonus of £1,000 from the government. 

This gives you a total savings of £5,000 per year. And therefore more money to earn interest on.

An estimated 4.4 million people have used ISAs to help save since the tax-free savings accounts were first launched in 1999.

Britons have collectively saved £119 billion in ISAs for property purchases. That’s an average of £19,751 each, according to research by the Centre for Economics and Business Research.

Why do people use ISAs to save for a home deposit?

The main advantage of using a Lifetime ISA (or the Help to Buy ISA, which ended in November 2019) to save for a home deposit is that the government tops up your savings.

There are two other advantages to using an ISA when saving for a home.

The first is that the interest you earn on savings in an ISA is not taxed. 

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The second is that cash ISAs typically offer significantly higher interest rates than normal savings accounts, with best buy rates of 1.65%. 

One thing to bear in mind when choosing an account for a housing deposit is when you’re likely to need the money.

This is because some of the highest paying ISAs require you to lock up your savings for a fixed period of time, which can be several years.

More about ISAs aimed at first-time buyers

The Lifetime ISA is specifically aimed at first-time buyers and people saving money to spend in their retirement.

You can save up to £4,000 each tax year into a Lifetime ISA.

This is either in a lump sum or regular contributions, which the government tops up with a 25% bonus of up to £1,000 a year.

You can pay into the account until you’re 50 years old. You can take your savings out of an ISA account when you are 60 years old or over. 

This means you could earn a maximum bonus of £33,000 from the government, if you paid in £4,000 every year for 33 years. You also earn interest on the money in the account.

There are a few restrictions for people who want to use the money to buy their first home that you need to be aware of.

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You’ll only be classed as a first-time buyer if you have never owned or inherited a home before. 

You can also only use the money to buy a property in the UK that costs £450,000 or less.

Finally, you must have had the account open for at least one year before you can use the money towards a property purchase. If you withdraw the money during that first year, you’ll have to pay a 25% fee.

Help to Buy ISAs, which were closed to new accounts in November 2019, also paid a 25% bonus (up to a maximum of £3,000 in total).

Despite these restrictions, ISAs are an extremely efficient way for first-time buyers to save on their first home.

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