First Time Buyer ISAs

Everything You Need to Know About ISAs for First Time Buyers

first time buyer deposit

How Do ISAs Work?

isas for first time buyers

We know how difficult it can be to save for your first home, and it can seem like you’re never going to get there. However, there are a number of first time buyer ISA options that could make the process much easier. 

However, with so many first time buyer saving schemes and benefits out there, it’s almost impossible to know how each one differs and which is right for you. 

Thankfully, we have put together this helpful guide, explaining everything you need to know about ISAs for first time buyers. We will answer all your first time buyer ISA questions to help you understand your options and make an informed decision about which will work best for you. 

So, let’s get started!

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What is a First Time Buyer ISA?

first time buyer isas

An Individual Savings Account (ISA) is a savings account or investment account that you don’t pay tax on. ISAs are different to other savings accounts in that they offer tax-free interest payments so that you get more for your money.

Each tax year, you get an allowance which sets the maximum you can save in your first time buyer ISA. The tax-free ISA allowance is the maximum amount (currently £20,000) you can save every year between 6 April one year and 5 April the following year. 

You must save or invest the ISA allowance by 5 April (the end of the tax year) for it to count towards the year’s allowance. Any unused allowance doesn’t roll over. So, if you don’t use it, you’ll lose it!

The benefit of not paying tax on an investment ISA is huge. In fact, according to research by Hargreaves Landsdown, ISAs saved us a total of £3.4 billion in income tax in 2019/20. 

There are two main types of first time buyer ISA, including the Help to Buy ISA and the Lifetime ISA. We will talk you through both of these ISAs for first time buyers, outlining exactly what they are and how they could benefit you.

What is a Help to Buy ISA?

help to buy first time buyers

The Help to Buy ISA scheme is a tax-free savings account for first time buyers, launched in 2013. This government ISA is designed to help first time buyers save for a mortgage deposit to buy a home. 

To qualify for a Help to Buy ISA, you must be a first time buyer and not own a property anywhere else in the world. 

So, how does a Help to Buy ISA work? The government adds £50 to the maximum monthly saving of £200 into the account so that you are able to save more money quicker. There is a maximum government bonus of £3000 on £12,000 of savings. This is then paid to your solicitor when you buy your first home. 

Unfortunately, Help to Buy ISAs are now closed to new applications, from 30 November 2019. However, those who already have a Help to Buy ISA can continue paying into it until November 2029. 

These first time buyer ISAs have now been replaced by the Lifetime ISA. 

Closing Help to Buy ISA

closing first time buyer isa

If you have opened a Help to Buy ISA in the last four years, it will soon be reaching maturity and will be closing. When your ISA closes, you won’t be able to reopen it or open a new one. So, what do you do next? Where can you put your money?

Don’t worry! The money in your Help to Buy account, along with the final bonus payment, will be paid into the nominated account you chose when you originally opened your ISA. If you want to, you can update your nominated account details at any time before your Help to Buy ISA closes. 

However, even when your ISA closes, it doesn’t mean you have to stop saving or spending all the money. If you’ve gotten into the routine of saving a certain amount each month, then it is a good idea to continue doing so despite your Help to Buy ISA reaching maturity. 

There are also a number of other places you can put your money where you could continue to earn interest or win prizes. These include: 

  • Easy access savings account 
  • Regular savings account 
  • Fixed rate savings account 
  • Premium bonds

What is a Lifetime ISA?

firs time buyer schemes

Lifetime ISAs (LISAs) are a type of ISA for first time buyers, designed to help them save for their first home. If you take out a Lifetime ISA, the government will give you a bonus worth 25% of what you pay in, up to a set limit, every tax year. 

So, how does a Lifetime ISA work for first time buyers? You can put a maximum of £4,000 into a Lifetime ISA each tax year. The government will then pay you a 25% bonus each month. No matter how much you have in your ISA, though, the maximum bonus you can earn in a tax year is £1,000. 

For example, if you put £1,000 into your Lifetime ISA, the government will add an extra £250, leaving you with £1,250 at the end of the tax year.

Lifetime ISA vs Help to Buy ISA for First Time Buyers

isas for first time buyers

You may be thinking that Help to Buy ISAs and Lifetime ISAs sound very similar, and you wouldn’t be wrong. However, there are a number of fairly significant differences between these types of first time buyer ISAs. 

Both these types of first time buyer ISA are designed to help you purchase your first home and give you a 25% bonus on your savings, subject to certain ISA rules and limits. 

Yet, the biggest difference between a Lifetime ISA and a Help to Buy ISA is that you can save £4,000 per year with a Lifetime ISA, compared with £2,400 with a Help to Buy ISA. 

Given this, many argue that, when it comes to ISAs for first time buyers, you should think about opening a Lifetime ISA as a first priority. However, while a Lifetime ISA does allow you to save more in a year, a Help to Buy ISA does offer a more flexible approach to saving your money. 

Another significant difference between these first time buyer ISAs relates to how and when the bonus is paid. The Lifetime ISAs bonus is paid monthly and can be used as part of any deposit you have to pay on exchange of contracts. By contrast, the bonus on the Help to Buy ISA must be claimed between exchange and completion. This means that the bonus will contribute towards your overall mortgage deposit and can’t be used at exchange. 

Thus, the main drawback of the Lifetime ISA for first time buyers is that you will have to wait at least a year to claim your bonus. 

You should also be aware that, if you draw the money out of either ISA before the age of 60 or for anything other than buying your first house, you’ll have to pay a government penalty of 25%. This could mean that you end up receiving less back than you put in in the first place.

How Many ISAs Can I Have in the UK?

firs time buyer schemes

You don’t just have to settle for one type of first time buyer ISA; instead, you can open multiple ISAs. This means that you can choose to use your ISA allowance in full, paying in the total £20,000 into one ISA account. Or, you can split your ISA allowance, using it as you wish across different types of ISA, as long as you don’t pay in more than £20,000 across them all. 

However, you can only open one ISA in each tax year. So, if you open a Help to Buy ISA in one year, you must wait until the following tax year to open a Lifetime ISA. 

If you have both a Help to Buy ISA and a Lifetime ISA, you can continue to save into both accounts. However, you should note that you’ll only be able to claim one bonus towards the purchase of your first home.

Other Options for First Time Buyers

moving home first time buyer

If a first time buyer ISA doesn’t appeal to you, there are a number of other options to help you start saving for your first home. These include: 

  • First Homes scheme – aimed at local residents and key workers, this scheme gives buyers a potential 50% discount on the price of a new-build property
  • 5% mortgages – an increasing number of lenders are offering 95% loan-to-value mortgages for buyers with a 5% deposit
  • Shared Ownership scheme – allows buyers to purchase a share of a property and pay subsidised ren on the rest to a housing association
  • Right to Buy – helps eligible council and housing association tenants in England to buy the home they are currently renting at a discounted rate

In this article, we have explained everything you need to know about ISAs for first time buyers. We hope we have answered all your first time buyer ISA questions so that you can better understand your options for saving for a house. 

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