How to save for a mortgage
06 March 2023
A Lifetime ISA (Individual Savings Account) is designed to help you save for your first home or for your retirement in later life. You can put up to £4,000 a year into a Lifetime ISA each year up until you are 50, although you must make your first payment into your Lifetime ISA before you are 40.
The benefit of a Lifetime ISA is that the government will add a 25% bonus to your savings, up to a maximum of £1,000 a year. You can hold a combination of cash, shares or stocks in your Lifetime ISA.
To open a Lifetime ISA, you must be over the age of 18 but under 40, and be either a resident of the UK or a Crown servant, such as a diplomat or overseas civil servant.
You are able to withdraw money from your Lifetime ISA when you are either:
- Buying your first home*
- Aged 60 or over
- Terminally ill with less than 12 months to live
If you withdraw cash or assets from your Lifetime ISA for any other purposes, known as an unauthorised withdrawal, you will be charged a withdrawal charge of 25%, which removes the government bonus that you had received on the savings.
Criteria to use your Lifetime ISA to buy your first home
You can use your Lifetime ISA to help towards buying your first home if all of the following
criteria are met:
- The property costs less than £450,000
- You purchase the property at least 12 months after you make your first purchase into
- the Lifetime ISA
- You use a conveyancer or solicitor to act on your behalf during the purchase - the
- ISA provider will pay the funds directly to them to use for the property purchase
- You are buying using a mortgage
If you are buying a home with someone else, they are also able to use their Lifetime ISA with the government bonus if they too match the eligibility criteria. If they already own a property, or have a legal interest in a property, then they will pay a 25% withdrawal charge to use their Lifetime ISA savings.
If you do not use your Lifetime ISA towards buying your first home, you can instead save it
for later life. You would pay a 25% charge if you withdraw the money, or transfer the Lifetime ISA to another type of ISA before the age of 60. A Lifetime ISA is one of many ways to save towards later life and retirement.
A Lifetime ISA is just one of four ISA’s currently available in the UK. An ISA is an Individual Savings Account, which enables you to save tax-free up to a certain threshold. In the 2022 to 2023 tax year, the maximum you can save in ISAs is £20,000. This is £20,000 in total for all of your ISAs, rather than £20,000 in each separate ISA.
The four types of ISA are:
- Cash ISA
- Stocks and shares ISA
- Innovative Finance ISA
- Lifetime ISA
How to open an ISA
To open an ISA in the UK, you must meet the following criteria:
- 16 or over to open a cash ISA
- 18 or over to open a stocks and shares or innovative finance ISA
- 18 or over but under 40 to open a Lifetime ISA
- Either a resident of the UK or a Crown Servant
You cannot hold an ISA with or on behalf of someone else. However, you can open a Junior ISA for children under the age of 18.
How could an ISA help you to save for a mortgage?
The primary benefit of an ISA is that up to the specified threshold, you do not pay tax on either the interest on cash in ISAs or the income and capital gains from investments held in ISAs.
Every tax year you can put money into one of each kind of ISA. As of the 2022 - 2023 tax year, you are able to save up to £20,000 in one type of account, or you can split the allowance across multiple different types of ISAs. As mentioned earlier, you can save a maximum of £4,000 into your Lifetime ISA in a tax year.
Your ISA does not close at the end of the tax year. Instead, for as long as you keep the money in the ISA account, you will keep your savings on a tax-free basis.
What can be included in an ISA?
Your Lifetime ISA can include either cash or stocks and shares.
Innovative Finance ISA
Your innovative finance ISA can include peer-to-peer loans and crowdfunding debentures. You cannot transfer any pre-existing peer-to-peer loans or crowdfunding debentures into an innovative finance ISA.
You are able to use savings in bank and building society accounts, as well as some National Savings and Investments products.
Stocks and shares ISA
Within your stocks and shares ISA you can include shares in companies, unit trusts and investment funds, corporate bonds and government bonds. However, you cannot transfer any non-ISA shares you already own into a stocks and shares ISA unless they are from an employee share scheme.
How to open an ISA
There are many different providers of ISAs, including but not necessarily limited to:
- Building societies
- Credit unions
- Stock brokers
- Other financial institutions
To open an ISA, contact a provider directly.
Withdrawing money from an ISA
There are different rules for withdrawing money from a Lifetime ISA compared to withdrawing money from one of the other types of ISA. In the types of ISA other than a Lifetime ISA, you can withdraw your money at any time, without losing any tax benefit. However, depending on the terms and conditions of your provider, you might be charged for making withdrawals and there might be certain rules regarding withdrawals. If your ISA is ‘flexible’, you can take cash out of the savings account and then put it back in later during the same tax year without reducing your current year’s allowance.
Transferring your ISA
You can transfer your ISA from one provider to another at any time. You can also transfer your savings from one type of ISA to another, although you must check the provider’s terms and conditions of doing so. There are certain restrictions to transferring your ISA, especially when transferring from one type of ISA to another. If you intend to transfer money you’ve invested into an ISA during the current tax year, you will need to transfer all of it to the new ISA.
For money invested in previous years, you retain the option to transfer all or part of the savings.
To ensure that you retain your tax-free allowance, if you transfer your ISA ensure that you correctly fill in an ISA transfer form. If you do not, you may not be able to reinvest the funds as part of your tax-free allowance for that tax year.
The ISA transfer should take no longer than 15 working days for transfers between cash ISAs and 30 calendar days for other types of ISA transfers.
Other ways to save on a mortgage
Whilst every mortgage lender will have their own criteria, there are certain factors that might help to reduce the cost of your mortgage. These include, but are not limited to:
Your credit history
A bad or incomplete credit history can add extra costs to your mortgage, as you might be subject to a higher interest rate compared to what you could be eligible for with better credit. Ensure your credit history is accurate and up to date, and settle any outstanding payments as soon as possible to minimise their impact on your credit score.
Increase your deposit
An increased deposit size might make you eligible for a lower interest rate, helping to save on the mortgage repayments.
Shorten the length of the mortgage term
By choosing a mortgage over a shorter period of time, you will pay less interest compared to a longer mortgage term. The trade-off is that the monthly repayments will be higher, but in the long run, you will save on the total amount paid for your mortgage.
Saving for your mortgage is a sensible decision when preparing to buy a home. However, you might be able to afford more than you expect when it comes to buying your next home. By speaking to a specialist mortgage advisor such as ourselves, you will be able to access offers from across the whole market, helping you to find the right mortgage for you and your financial situation. To book a free, no-obligation appointment with one of our friendly team, please use the link below.