Using ISAs to buy a home: everything you need to know

Feeling daunted by the prospect of saving money to buy a new pad? You’re not alone. Getting a deposit together can be the hardest part of buying a home.

Whether you’re a first-time buyer or a homeowner moving up the housing ladder, forking out for a new home can be a financial challenge. 

The good news is that there are different ways to save your hard-earned money.

Here’s the lowdown on how ISAs could help you get the keys to your next home.

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Let’s start with the basics. ISA stands for individual savings account. They are savings or investment accounts that allow you to save money tax-free. And, as the name suggests, they can only be held in one person’s name.

There are several different types of ISAs, including:

• Lifetime ISAs

• cash ISAs

• stocks and shares ISAs

• innovative finance ISAs.

You can put up to £20,000 into ISAs each tax year.

The allowance can be split between different types of ISAs. But you can only pay into one of each kind of ISA each year.

It’s also worth noting that you can only pay £4,000 into your Lifetime ISA each tax year.

If you’re planning to buy your first home, the Lifetime ISA, otherwise known as LISA, could be the most eye-catching of them all.

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

You can save up to £4,000 into a Lifetime ISA each tax year. And the government adds a 25% bonus on whatever you’ve managed to save.

If you manage to save the full £4,000, you’ll receive a bonus of £1,000. That gives you total savings of £5,000 each tax year. 

You can hold cash or stocks and shares in a Lifetime ISA, or have a combination of both.

There are rules that you need to be aware of if you want to use a Lifetime ISA to buy your first place. They include:

• the property you’re buying should cost no more than £450,000

• the property must be in the UK 

• the property must be purchased with a mortgage

• you must live in the UK when you apply for a Lifetime ISA, but it doesn’t matter if you’re a UK citizen or not. (There are a few exceptions to this though.)

• you must plan to live in the property you’re buying

• you must be a first-time buyer and have never owned a property before, anywhere in the world

• even if you previously inherited a property, sold it instantly and never lived in it, you’d no longer count as a first-time buyer

• you must have had a Lifetime ISA open for a year to get the first-time buyer bonus

• you must be 18 or over but under 40 to open a Lifetime ISA.

What is a Lifetime ISA?

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You can use the Lifetime ISA to fund your retirement too.

You can put money into the account until you’re 50 years old. So you could earn a bonus of a cool £33,000 from the government if you paid £4,000 into a Lifetime ISA every year. 

But it’s worth noting that you can withdraw money from a Lifetime ISA if you are:

• aged 60 or over

• terminally ill, with less than a year to live

• buying your first home.

But you’ll face a 25% penalty if you make a withdrawal for any other reason.  

The Help to Buy ISA was launched in 2015. It allows first-time buyers to pay in up to £200 each month, with the government topping up savings by 25% (up to a maximum of £3,000).

You can no longer open a Help to Buy ISA. But if you already have a Help to Buy ISA, you can continue paying into it until November 2029 and claim your 25% government bonus until November 2030.

You can use the money you’ve saved in a Help to Buy ISA to put towards your deposit when exchanging contracts. That’s when the purchase becomes legally binding. 

However, the government bonus is only paid once it's certain that your purchase will go ahead. That means in most cases, you'll claim the bonus between exchanging contracts and completing. That’s when everything is tied up.

So in other words, the government bonus contributes towards the overall deposit but not the deposit due when exchanging contracts.

What’s the difference between exchange and completion when buying a home?

Yes, you can have a Lifetime ISA and a Help to Buy ISA. Just remember that you can no longer open a Help to Buy ISA.

But you can only claim the bonus from one of them to put towards getting onto the housing ladder. As always, seek professional advice and read the small print before taking any action. 

A cash ISA works in a similar way to an ordinary savings account. But you don’t pay tax on interest on cash in an ISA. Remember too that you're limited in how much you can save in each tax year.

One of the things to bear in mind when choosing an account is when you’re likely to need the money. That’s because some ISAs require you to lock up your savings for a fixed period of time, which can be several years.

As with all savings and investments, there are various factors to consider.

It’s important to seek professional advice and take your time deciding what could suit you best. Also remember that tax rules may change in future.