In this article, Nicholas Harding, CEO at peer-to-peer lending platform Lending Works, takes a look at three alternative methods of saving for your first home that aren't the Help to Buy ISA.
In November 2019, the Help to Buy ISA closed to new applicants, removing one option for people looking to save up for their first home and receive the helpful 25% bonus. However, while the closing of the scheme narrowed the choice for those without an active H2B ISA, there are still a few ways to effectively build up some savings using other types of ISA account.
Below, I've set out three alternative ISA options if you are looking to save for a home in the future, as well as giving a quick overview of the ISA rules to help you stay on track.
What are the ISA rules?
Each tax year (6 April–5 April) you can pay up to £20,000 into one or more ISAs, which are savings and investment accounts that allow you to build up funds without paying tax. This means you don't pay any tax on earnings from your money, such as Income Tax on interest earned or tax on dividends from stocks and shares, and you won't pay anything when you withdraw, either.
There are a few essential rules you need to know before saving into an ISA:
• You have an annual ISA allowance of £20,000 each tax year. This is the maximum total you can pay in — if you go over it, you'll be penalised. This limit resets at on 5 April every year, and you will get a new £20,000 limit on the 6 April.
• You can choose to pay up to £20,000 into one ISA or split over a few accounts, but you can only pay into one of each type of ISA per year. The four types of ISA are: cash ISAs, stocks and shares ISAs, innovative finance ISAs, and lifetime ISAs.
• You can transfer money between your ISA accounts, but if you want to move money you added in the current tax year, it must be moved in full. Past years' funds can be moved freely without any limitations.
For in-depth guidance on the rules and a detailed look at each type of ISA, I would recommend that you take a look at the range of ISA guides at Lending Works.
What are the best types of ISA to save for a house?
With four main types of ISA to choose from, I've chosen the three that are best placed to give your savings the boost you need to get onto the property ladder.
- Lifetime ISA
What is it? The Lifetime ISA (LISA) is an account used for saving for your first home, retirement, or both. You will receive a 25% boost to your savings that is similar to the H2B ISA. You can hold both cash savings and investments within these accounts.
Who's it for? To open a Lifetime ISA, you need to be aged between 18–39, but you can add to the account until you are 50. If you wish to use the ISA for a home, it must be your first property, and if you wish to use the money for retirement, you must be aged over 60.
How much can I save? You can save up to £4,000 per tax year into a LISA, which still counts towards your overall £20,000 ISA allowance.
Advantages? The main advantage of a LISA is the 25% bonus — you can get up to a £1,000 boost if you save the full £4,000 per year. And, because you can only use the money for a house or retiring, it will help you to remain focused and disciplined in your saving.
Disadvantages? The major disadvantage of a LISA is the fact you can't access your cash freely, as you need to pay a 25% charge to withdraw, so you can't just take out money if you need it without being penalised. You are also capped at £4,000 per year and can only save until you're 50.
- Innovative Finance ISA
What is it? The Innovative Finance ISA (IFISA) is an account you can use to build tax-free earnings from peer-to-peer lending, which is where you invest money, it's loaned to others, and you receive repayments plus interest.
Who's it for? Anyone can invest in an IFISA, provided they are over 18 and a resident of the UK. As it is a form of investment, it may best suited to those who want to experience better returns than cash savings can offer and are willing to take on a small amount of risk to do so.
How much can I save? You can invest up to the full £20,000 annual ISA limit in an IFISA. Returns from your loans do not count towards this allowance.
Advantages? The big advantage of an IFISA is their ability to outperform cash savings without the need to take on a huge amount of risk, like investing in the stock market. Typically, you can benefit from a good amount of growth in a 3–5-year period, which is realistic in terms of saving for a home.
Disadvantages? Like any investment, you need to be willing to take on a level of risk with an IFISA, as there is the chance a borrower may default on a loan. However, you can mitigate this by choosing a reliable platform that has a good track record and robust security measures in place. IFISA providers are also not currently covered by the FSCS to provide compensation in the event of loss.
- Stocks and Shares ISA
What is it? A Stocks and Shares ISA is an account that can hold investments you make, ensuring any earnings are tax-free. Most of these investments are made through fund providers.
Who's it for? Anyone over 18 can open a Stocks and Shares ISA and start investing. However, if you don’t want to take on the high level of risk associated with the stock market, you may be better off looking at other options.
How much can I save? You can invest up to the full £20,000 annual ISA limit in a Stocks and Shares ISA. Any returns, like Capital Gains or dividends, are tax-free and don’t count towards the limit.
Advantages? The major advantage of a Stocks and Shares ISA is their capability to provide better returns than cash savings, so you may see your money grow quicker. They're very flexible, too, so you can invest in whatever you want, or you can let someone else manage the account for you.
Disadvantages? The big disadvantage of these accounts is the level of risk you need to take on to see good returns. When you invest in the market, you could see your assets rise and fall in value, so its always possible that your funds can decrease rather than grow.
Consider these three types of ISA as an alternative to the Help to Buy ISA and you could maximise your savings for your first home. Just remember that you should always get financial advice if you aren't sure what route is the best for you.