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What's the best ISA to save for a mortgage?

17th February 2020

What’s the best ISA for saving for a mortgage? 

A mortgage deposit is likely to be the single largest item you save for across your lifetime. Given its size, the government has in place a number of schemes that make it easier to save for and take the first step onto the property ladder. 

Among these are various types of ISAs – savings accounts designed to give a boost to your hard-earned cash. But which is the best for saving for a mortgage? Let’s take a look. 

 

No more Help to Buy 

The government’s Help to Buy scheme has been the most important ISA in saving for a mortgage over the past few years. Unfortunately, it’s no longer possible to open a new account on the scheme as the government discontinued it on 30th November 2019. If you already have one though, you’ll be able to continue paying into it until 2029. 

 

Lifetime ISA 

Whilst the Help to Buy scheme is no longer accessible for new savers, there is an alternative ISA to help you build a mortgage deposit. Lifetime ISAs let you save up to £4,000 a year towards a deposit or a retirement fund, and gives you a 25% bonus from the government to help you reach your target faster. You could therefore stash away £5,000 annually, plus any tax-free interest on top. The maximum bonus you can receive with a Lifetime ISA is £33,000 (or £32,000, if you’re born on or after 6th April, the end of the tax year). 

 

Pros and Cons of Lifetime ISAs  

 Generally speaking, you get more out of a Lifetime ISA than you would with a Help to Buy ISA. You do however sacrifice flexibility. Here’s our breakdown of the main pros and cons of Lifetime ISAs for saving for mortgage deposit when compared to a Help to Buy ISA. 

 

Pros 

  • Maximum contribution – As already mentioned, the maximum annual contribution for a Lifetime ISA is £4,000. This compares to £2,400 for a Help to Buy ISA (or £3,400 in the first year). 
  • Maximum Bonus – The maximum amount of help you’ll get from the government with a Lifetime ISA is £33,000 – this is if you pay in £4,000 every year between the ages of 18 and 49. For a Help to Buy ISA, on the other hand, the maximum bonus you can get is £3,000 – this is if you contribute £200 a month over a period of 4 years and 8 months. 
  • Bonus payments – With the Help to Buy scheme, you receive your bonus only once you’ve completed the purchase of your new home. The bonus for Lifetime ISAs are paid out on a monthly basis – arriving in your account around 6-8 weeks after. 
  • Stocks and shares – Lifetime ISAs offer the possibility to invest in stocks and shares, rather than just depositing cash as with the Help to Buy scheme. If your investments perform well, therefore, you could end up adding more to your nest egg. However, it’s always important to remember that the door swings both ways, and your investments could end up costing you money rather than helping you save.
  • Home deposit and mortgage deposit – Lifetime ISAs can be used towards both a home deposit and a mortgage deposit, whilst a Help to Buy can only be used for the latter. What’s the difference between the two deposits? A home deposit is basically an amount to secure the property before formally exchanging contracts – it’s usually about 5-10% of the property’s value. The mortgage deposit comes later on, and is the amount needed to officially commence a mortgage agreement. 
  • Lump sums – Unlike a Help to Buy ISA, you can pay into a Lifetime ISA whenever suits you. This is helpful if you’re unable to commit to monthly payments, and would rather have more control over your cash flow. 

 

Cons 

  • Time restrictions – You only have access to a Lifetime ISA after 12 months. Help to Buy ISAs were more flexible – you can use them as soon as you’ve built up £1,600. 
  • Use restrictions – Lifetime ISAs can only be used for a retirement fund or for saving for a mortgage deposit. If you’re not intending to use the savings to buy a house, you have to wait until you’re 60 years old to withdraw them or you’ll face a penalty charge for early withdrawal. With a Help to Buy scheme, you can take out your savings at any time – if you do so before buying a home though, you won’t benefit from the government’s 25% bonus. 

 

Saving for a mortgage deposit can feel like an uphill struggle. With a Lifetime ISA though, you can make the load a little easier and reach your deposit target faster. If you’re currently exploring ways to save for a new home, then get in contact with IMC Financial Services. Our expert financial advisors will be able to help you find the best way to build up your savings and once you have, our mortgage brokers will be able to secure you the best loan deals available. 

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