How to Use an ISA to Buy Your First Home

POSTED ON Monday, 12 October, 2020

The task of saving for a deposit on your first home is a long and tough one, but it will all be worth it when you finally unlock the door and have your first glass of bubbly in your new home. You’ll want all the help you can get in struggling up the hill of deposit-saving, so putting your savings into a tax-free wrapper can help. But which one should you choose? We’ve broken down your options to help you make an informed decision.

When thinking about how to use an ISA to buy your very first home, the first thing that comes to mind is a Help to Buy (HTB) – but as of November 30th, 2019, you cannot open a new Help to Buy ISA.

You can still use an existing HTB ISA you hold, but if you’re looking to open an ISA account to save for your first house deposit, you still have options, including:

  1. JISA
  2. Lifetime ISA
  3. Investment ISA

Junior ISAs

This is one for the future planners; if you’re under the age of 18, a parent or guardian can open this account on your behalf. A JISA is an ISA account for someone under the age of 18, opened by their parents, where money can accrue in their name, and gain returns which are not subject to capital gains tax or income tax.

If you already have one, you’ll likely know – it’s a great way for parents who wish to gift money to their children and keep it safe from the tax man.

And considering that the current yearly ISA limit for a JISA is £9000, it’s definitely an option worth looking at if you’re under 18, have savings you’d like to one day put towards a house deposit and you have a parent willing to open you an account.

You’ll be able to manage the money from the time you’re 16, but you won’t be able to access it until you turn 18. 

Lifetime ISAs 

A Lifetime ISA account is probably the best option for saving for a house deposit – largely, because one of the main functions of this account is to help first time buyers to save for their first deposits.

With a Lifetime ISA (LISA) you can save up to £4000 each year into an account which the government will add a 25% boost to each year.

This means you could stand to gain up to £1000 each year of free money should you put in the maximum amount of £4000 each year.

This is a very attractive return rate – but it does come with one very important catch: you can only withdraw the money in two instances, or you loose the 25% bonuses and may be subject to further penalties.

These two instances are:

  1. Withdrawing the funds for a deposit on your first house
  2. Withdrawing the funds to fund your retirement once you’re over the age of 55

Investment ISAs

An Investment ISA, also known as a Stocks and Shares ISA, allows you to invest your money without paying tax on the returns.

The government cap on an ISA means that with an Investment ISA, you can invest up to £20,000 each tax year into any ISA account.

If you’re looking to grow your money, you’ll want to be thinking about opening a Stocks and Shares ISA, as they tend to generate higher returns than other ISA accounts, such as Cash ISAs.

However when it comes to saving for a house deposit, an Investment ISA may not be the best option if you are looking to save for less than five years. Five years is generally the recommended amount of time that Investment ISAs should be left to accrue interest, to allow for general fluctuations in the market. 

Read more about Investment ISAs

Read more about Lifetime ISAs

Read more about Junior ISAs