Whether you're looking for a long-term investment or a safer place to park your money, it's essential to understand the options to find the best ISA for first-time buyers.
Below, we explore the most common types of ISAs suitable for a first-time buyer in the UK, including their pros, cons, and other considerations.
Stocks and shares ISA
One of the most popular options is a Stocks and Shares ISA. This allows you to invest in a range of assets, including equities, bonds, and investment funds, with any returns being tax-free.
Key features:
- You can invest up to £20,000 in a tax year.
- Offers the potential for higher returns compared to cash savings.
- Tax-free dividends and capital gains.
Considerations for first-time buyers
While not specifically designed as a housing ISA, a Stocks and Shares ISA can be suitable for those with a longer savings horizon and a higher risk tolerance. If you're planning to buy a home several years down the line, this ISA might help your savings grow faster than in a traditional savings account.
However, the value of investments can go down as well as up, so it may not be the best option if you plan to buy soon or cannot afford to take risks with your deposit.
Cash ISA
A Cash ISA is a simple, low-risk way to save money tax-free. It works like a regular savings account but shields your interest from income tax. The average annual returns for a CASH ISA are usually between 3–5%.
Key features:
- You can save up to £20,000 per year.
- Fixed-rate and easy-access versions available.
- Government protection up to £85,000 under the FSCS.
Considerations for first-time buyers:
A Cash ISA is a good choice for cautious savers who want certainty. While it doesn't offer the bonuses of a Lifetime ISA or the higher potential returns of a S&S ISA, it is a safe and predictable option. It's especially useful if you're not eligible for a Lifetime ISA or want to diversify your savings.
Help to buy ISA (closed)
The Help to Buy ISA was a government initiative designed to help first-time buyers save for a mortgage deposit. While it closed to new applicants on 30 November 2019, many people still hold active accounts.
Help to buy ISA explained:
- You could save up to £200 per month, with an initial deposit of £1,200.
- The government adds a 25% bonus on savings up to £12,000 (a maximum bonus of £3,000).
- The bonus is only applied when buying a first home costing up to £250,000 (or £450,000 in London).
Considerations for first-time buyers:
For those who already have a Help to Buy ISA, it remains a valuable tool when saving for a house. The guaranteed government bonus provides a boost to your deposit, especially for smaller property purchases.
However, there are a few limitations:
- You cannot use the bonus at exchange, which can affect your deposit timeline.
- The property price cap may be restrictive in areas with high housing costs.
- You must claim the bonus through your conveyancer, which adds an administrative step.
If you’re comparing it with newer options like the Lifetime ISA, it’s worth calculating which account offers the better return based on your property budget and timeline. And remember, while you can have both accounts, you can only use the bonus from one ISA for your home purchase.
Lifetime ISA
The Lifetime ISA (LISA) is currently the most popular ISA for first-time buyers due to its generous government bonus and flexibility.
LISA key features:
- Available to UK residents aged 18–39.
- Save up to £4,000 per year and receive a 25% bonus (up to £1,000 annually).
- Use funds to buy a first home (worth up to £450,000) or for retirement after age 60.
Why it’s the best ISA for first-time buyers:
The Lifetime ISA first-time buyer benefits are hard to beat. You get a significant boost from the government, and your money grows tax-free. It's arguably the best ISA for first-time buyers if you're eligible and plan to purchase a home within a few years.
However, withdrawals for any reason other than buying a qualifying home or retirement incur a 25% penalty, effectively losing the bonus and some of your own savings.
ISAs compared
When it comes to choosing a saving for house ISA, your best option depends on your timeline, risk tolerance, and eligibility. Here’s a quick summary:
| ISA Type | Ideal For | Bonus/Benefit | Risk Level |
|---|---|---|---|
| Stocks and Shares ISA | Long-term savers with risk appetite | Tax-free investment growth | Medium/High |
| Cash ISA | Low-risk, short-term savings | Tax-free interest | Low |
| Help to Buy ISA | Existing holders only | 25% government bonus | Low |
| Lifetime ISA | Eligible first-time buyers | 25% government bonus | Low/Medium |
If you're serious about buying your first home, using an ISA for mortgage savings can provide both tax advantages and potential bonuses. The Lifetime ISA first-time buyer pathway currently offers the most substantial support from the government.
Buy with a smaller deposit with Shared Ownership
Shared Ownership allows you to buy a share of a home, starting at 25%, meaning the initial deposit can be smaller.
For example, the deposit required for someone buying a 25% share of a property valued at £400,000 would be calculated as follows:
Property Value - £400,000
Share Purchased (25%) - £100,000
Deposit (10%) = £10,000 (10% of £100,000)
It’s a great option for buyers who are priced out of the full market but want to take a step onto the property ladder. With lower deposits and monthly costs, Shared Ownership makes homeownership more accessible, especially in high-demand areas like London.
Peabody is one of the largest housing associations in the UK, offering affordable housing throughout London and the Home Counties. You can browse our range new build Shared Ownership homes today.
Frequently asked questions about ISAs
You can no longer open a new Help to Buy ISA, as the scheme closed to new applicants on 30 November 2019. However, if you already opened an account before that date, you can continue contributing until November 2029, and claim the government bonus by December 2030.
For a similar alternative, the Lifetime ISA is still open to new applicants and offers a 25% government bonus for first-time homebuyers.
To open a Lifetime ISA, you must be:
- A UK resident aged 18 to 39
- Saving for your first home or retirement
You can open a Lifetime ISA through banks, building societies, and online investment platforms that offer them. You’ll need to provide identification and some personal information. Once opened, you can contribute up to £4,000 per tax year, and the government will add a 25% bonus - up to £1,000 annually.
Be sure to compare providers, as some offer cash LISAs with fixed interest, while others offer stocks and shares LISAs with investment options.
With a Help to Buy ISA, the contribution rules are:
- An initial deposit of up to £1,200
- Followed by £200 per month maximum
- The government adds a 25% bonus on savings up to £12,000, resulting in a maximum bonus of £3,000
You can continue saving and claiming the bonus if your account was opened before the 2019 cut-off date. It's important to remember that the bonus is only applied when buying a qualifying first home and through a solicitor or conveyancer.
Yes, you can have both a Help to Buy ISA and a Lifetime ISA, but there’s a crucial caveat. While you can contribute to both accounts, you can only use the government bonus from one when buying your first home.
This means you'll need to choose whether to use the Help to Buy ISA bonus or the Lifetime ISA bonus toward your home purchase.
