Buying a property, for most people, means saving a hefty sum of money. Whilst the more organised among us may have been saving since childhood, the rest will need to create a plan to save enough for deposit, legal fees, stamp duty and other expenses. But where should you save your money for buying a property? We run through the main choices and why you might consider each one.
In a nutshell
|Where||Best for||Pay in||Pay in||Details|
|Help to Buy ISA*(no longer available for new savers)||First-time property buyers||Up to £200/month||Government tops up 25% (up to £3,000 limit) when you buy your first home.||Read more|
|Cash Lifetime ISA (LISA)||First-time buyers or long-term savers under 40||Up to £4,000/year||Government adds a 25% bonus (up to £1,000 each year)||Read more|
|Stocks and shared Lifetime ISA (LISA)||First-time buyers or long-term savers under 40||Up to £4,000/year||Government adds a 25% bonus (up to £1,000 each year)||Read more|
|Stocks and shares ISA||Long-term savers who are prepared for risk||Up to £20,000/year (across all your ISAs)||Won’t pay some taxes on your savings; possibility of higher growth||Read more|
|Cash ISA||Savers who want to take fewer risks with their money; shorter-term savers||Up to £20,000/year (across all your ISAs)||Won’t pay some taxes on your savings; lock in an interest rate with a fixed term account||Read more|
|Other investments||Long-term savers who are prepared for risk||As much as you want||Can supplement your other savings if you go over the ISA limits but still aim for higher growth||Read more|
|Cash savings account||Shorter-term savers||As per individual account regulations||A variety of solutions to suit your needs; access your money quickly if needed||Read more|
The type of savings or investment account that is right for you will depend on your individual circumstances such as age, whether you’re a first-time buyer or not, how much money you have to put away and how much risk you’re willing to take. We’ve divided the options into specialist accounts for first-time buyers, ISAs, and other savings/investments.
Specialist account for first-time buyers:
There are two ISA accounts specially designed for first-time buyers, with a nifty government bonus attached. Saving into these accounts will count towards your ISA limit of £20,000 per year, so be aware of this if you have other ISAs.
Help to Buy ISA
The clue’s in the name: the Help to Buy ISA was designed to help first-time property buyers. It is no longer possible to open a new Help to Buy ISA. So this will only be an option for saving if you happened to have one already. The big advantage of a Help to Buy ISA is that the government puts in a 25% bonus (up to a £3,000 limit) when you buy your first home, which gets added to your deposit. But there are some limits on the property you can purchase (max £250,000, or £450,000 in London) and it must be your only home, where you intend to live. And you can only put in up to £2,400 a year. However, the 25% bonus is definitely a boost to your deposit, and if you’re saving with a partner, they can get this boost too!
Lifetime ISA (LISA)
If you didn’t open a Help to Buy ISA, or you’re looking to get the bonus payment on a more flexible form of savings account, a LISA could be for you. The LISA is designed for first-time buyers or those who want to save more for retirement. You’ll get the government bonus monthly, up to a total of £1,000 monthly. There are some restrictions – the LISA is only available up to the age of 40, and only first-time buyers can use it for property-purchase (up to £450,000). If you choose not to buy a property, you can access your money without fees from the age of 60. Taking your money out beforehand, unless you’re buying a home, will incur charges.
You can choose either a cash LISA or a stocks and share LISA, as with any other kind of ISA. If you have a longer time to save (more than five years), a stocks and shares LISA could yield better returns (although be aware that the value of investments can go down as well as up). If you are aiming to buy your home in the next few years, a cash LISA could be the best option.
An ISA account is a tax-free savings account. There are different types of ISA, and you can pay into one of each type, with a total tax-free allowance of £20,000 over the course of a year. Two of the major types of ISA are stocks and shares, or cash.
Stocks and shares ISA
This type of ISA invests your money in stocks and shares. This means there is some risk involved, but also the chance of higher gains as investment tends (although is not guaranteed) to have higher returns over time than interest on a cash savings account. Additionally, a stocks and shares ISA could yield better outcomes if you are able to leave your money to grow for some time – probably at least five years. So if your property purchase is some way off, and you’d like the chance to get a decent return on your investment, a stocks and shares ISA could be a good choice. But if you’ve not got much time to save, this might not be the best choice. If you do decide to go down this route, you’ll need to decide if you want an easy-to-use ‘robo’ platform that can build a portfolio for you, or you want to manage more of your investments yourself. And make sure you research fees and charges before putting in your money.
A cash ISA allows you to earn tax-free interest on your savings. You can save up to £20,000 a year, but remember this is shared across your different ISA accounts. Unlike a stocks and shares ISA, your money won’t be directly invested, but instead will earn interest while it remains in the account. There are different kinds of cash ISA that may have different interest rates; for example, a fixed-term cash ISA, where your money is held for one or more years, usually has a higher interest rate than a quick-access account. So, if you have a bit longer to save, you might be able to get a higher return on your money. But in general a cash ISA is suitable for someone who needs to save over the shorter-term (<5 years) as opposed to a stocks and shares ISA.
Other savings and investments:
If you’ve maxed out your ISA allowance, or can’t use an ISA for another reason, you may need to use another kind of savings or investment account. For example, you could invest in stocks and shares outside an ISA account, or open a regular savings account. You may need to keep an eye on any tax requirements if you’re saving in this way. As with an ISA, stocks and shares are more suitable if you’re saving in the long-term, and other savings accounts could be better if you need to access your cash quickly.
Which product is right for you will depend on your individual circumstances. If you’re stuck, you can connect with a financial expert through your Maji account to get help with how to save for your property.
Photo by Bethany Opler on Unsplash