I'm looking to buy a house in the future should I go for a cash or stocks & shares ISA?

16 July 2021

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Question by Jess

Hi there. I'm looking to buy a house in the future but can't decide whether to open a cash or stocks and shares Lifetime ISA for saving towards a deposit. I'll probably look to buy in a few years but not sure when exactly. Which should I go for? I'm worried about losing money if I chose to invest it but then I know interest rates are awful right now. Any help would be appreciated! Thanks, Jess


Answered by James Greenly


Hi Jess

How exciting! There is nothing quite like buying your first home and I hope I can give you some guidance as to how to best approach it.

You are certainly doing the right thing by considering a Lifetime ISA. I’m sure you have done the research but just to confirm some of the eligibility criteria:

• You must be over 18 but under 40 when you apply
• It must be your first home (which it is, tick!)
• You can personally pay in a maximum of £4,000 each year

Now onto the conundrum you face – do you opt for a cash ISA, with very poor rates, or take a chance and go for a stocks & shares ISA, and potentially get better returns but face the prospect of getting out less than you’ve put in?

There are some questions you should ask yourself first:

• When are you hoping to buy your first home? In 1,2,3 years…?
• What sort of home are you looking for, and what would this cost?
• What is your mortgage borrowing potential, and therefore what deposit will you need?
• How much are you able to save each year?
• Are you going to get any financial support towards the deposit?

Hopefully having asked yourself those questions, you will have a clear idea as to what level of deposit you are aiming for, and what your investment time frame is.

Please note that this is purely guidance and should not be considered advice to invest or not invest, however in my view if you are hoping to buy your home in the next three years, then I would probably suggest that you opt for a cash approach, rather than investing your money.

Whilst cash interest rates are very low, the benefit of a lifetime ISA is that your money already gets an immediate 25% boost from the government, equivalent to a 25% return (but with zero risk)!

If you do still want to try and achieve returns better than the interest rates on offer (which realistically are going to be less than 1% a year), then you could open a stocks and shares Lifetime ISA, keeping your own personal contributions in cash, and only invest the government 25% top up.

That way, you do not run the risk of losing any of your ‘own money’ – but still potentially achieve investment returns on the ‘free’ money from the government.
It is important that if you do decide to invest some or all of the money, that you do lots of research into the type of investment you go for, and understand the risks involved.

I hope this helps. Please feel free to reach out if you need any support or guidance, and good luck on your house buying journey.

Best wishes

James

Answered by

James Greenly

Chartered Financial Planner

I am a Chartered Financial Planner at Capital Asset Management, a boutique financial planning and wealth management firm based in the City of London.