What’s the best option for saving for a house?

1. Lifetime ISA

If you’re a first-time buyer and you’re hoping to buy a home worth £450,000 or less, a Lifetime ISA (LISA)  is probably the best option. You can save up to £4,000 a year into your Lifetime ISA and the government will boost your savings by 25% for free. Max out your account for 5 years, and you’ll get a whopping £5,000 government bonus! 

What are the types of Lifetime ISAs?

There are two main types of LISA to choose from: a Cash LISA and a Stocks & Shares LISA. With a Cash Lifetime ISA, you’ll earn interest, but the rate will depend on your chosen provider - at Tembo, we offer the market-leading rate! With a Stocks & Shares LISA, you won’t earn interest on your savings; instead, your money will be invested in the stock market. The best option for you will depend on how soon you’d like to buy a home and how comfortable you are with risk. 

If you’re hoping to buy in 5 years or less, a Cash ISA will usually be best, as your money will be waiting for you whenever you need it. Stocks & Shares LISAs are better suited to more long-term goals of say 10 years or more, as the value of your investments can rise and fall over time. Your money will be at risk, and there’s no guarantee you’ll get back more than you put in. So if you’re hoping to buy in the next few years, you might be better off keeping your deposit in cash. 

Keep in mind that if you need to access your LISA savings for anything other than your deposit on your first home or retirement, you’ll be hit by a 25% withdrawal penalty on the amount you withdraw. This means you could get back less than you put in. So avoid putting money in your LISA that you may need for short-term expenses or emergencies!

2. Cash ISA

If you’ve maxed out your Lifetime ISA or it’s unsuitable for the property you’d like to buy, you can also save for a house and earn tax-free interest by using a Cash ISA. You can save up to £20,000 a year in a Cash ISA (or £16,000 if you’ve maxed out your LISA) and withdraw your money for any purpose without paying a government withdrawal penalty. 

Some providers will offer you a lower interest rate if you exceed a certain number of withdrawals each year, so if you may need access to your money, opt for a Cash ISA with unlimited withdrawals instead.

You won’t get the 25% bonus on your Cash ISA savings like you do with a Lifetime ISA, but a Cash ISA is still a great place for both short and long-term savings, especially since interest rates are higher than they were a few years ago. Plus, with the Tembo Cash ISA you’ll earn hundreds more in interest over 5-years vs saving with the Big 4 banks!*

You might like: Best Cash ISAs in the UK

3. Easy-access savings accounts

If you’ve used up your £20,000 ISA allowance for the current tax year, you could keep any additional savings in an easy-access savings account. Interest rates are higher today than they were a few years ago, making savings accounts much more rewarding than they used to be. You can find accounts offering up to 5% or even 6%, but these rates are often only available on smaller amounts of money and you may need to have a current account with the same provider. 

Just remember that, unlike ISAs, any savings you place in an easy access savings account will be taxable. This is due to the fact that money in other savings accounts isn’t in a tax-free wrapper, so is subject to your Personal Savings Allowance (PSA). This is the amount of interest you can earn on your savings before you need to pay tax on it. The amount of your PSA depends on your income tax band:

• Basic Rate Taxpayers: Can earn up to £1,000 in savings interest tax-free each year.
• Higher Rate Taxpayers: Can earn up to £500 in savings interest tax-free each year.
• Additional Rate Taxpayers: Do not have a Personal Savings Allowance and must pay tax on any savings interest.

Perfect for you: Best savings accounts in the UK

4. Fixed savings accounts

If you’re happy to lock your deposit away for a set period of time, you might get a better interest rate (on larger sums of money) with a fixed savings account than an easy access savings account - although this isn’t guaranteed. You could fix your account for one, two, three or more years. It all depends how long you’re happy to wait until you buy your own place. 

Unlike a Lifetime ISA, you won’t get a free 25% bonus from the government, and your money won’t be tax-free. But, you can use the funds for anything, not just your first home or retirement, and if you pick a fixed-rate ISA with a competitive interest rate you could help to grow your savings. Just remember that if you need to access your money before the end of a fixed term, your provider may charge you a fee or lower your interest rate.

5. Notice savings accounts

Notice savings accounts are another option for saving for a house. They tend to have higher interest rates on larger amounts of money than easy-access savings, but you’ll need to give your provider notice to withdraw your money. 

This can make them unsuitable if you also need quick access to your savings in an emergency. To get around this, you could build up an emergency fund separate from your house fund to cover any last-minute costs like car repairs. 

Again, unlike a Lifetime ISA any savings you place in a notice account aren’t tax-free, meaning that any savings you put in these accounts will be subject to your Personal Savings Allowance (PSA) - the amount of interest you can earn on your savings before you need to pay tax on it, which is determined by your tax band.