What’s the best option for saving for a house?
Shahi SattarFor most first-time buyers in the UK, a Lifetime ISA is the single best place to start, thanks to the free 25% government bonus on savings. But the right option will depend on individual circumstances, how soon you're looking to buy, and how much you'll need to save.
Before choosing where to put your money, it's worth figuring out roughly how much deposit is needed. A good starting point is to research property prices in the area you'd like to buy and work backwards from there. Once there's a target in mind, it becomes much easier to set a monthly savings goal and pick the right account, or combination of accounts, to get there.
With the right bank account, you can reach your savings goals faster and even pay less tax. But with so many accounts to choose from, including ISAs, LISAs and easy access accounts, here's a breakdown of the best options for saving for a house.
Key takeaways
- Lifetime ISA (LISA): Best for first-time buyers under 40 buying a home up to £450k; includes a 25% government bonus.
- Cash ISA: Ideal for tax-free interest on savings up to £20,000 per year without government withdrawal penalties.
- Easy-Access & notice accounts: Good for flexibility or higher rates on large sums, but interest is subject to Personal Savings Allowance tax.
- Fixed-Rate accounts: Best if you can lock your deposit away for 1-3 years to secure a guaranteed interest rate.
- Tembo HomeSaver: Offers a boosted rate (up to 5.5% AER) specifically for those planning to mortgage through Tembo.
Tax treatment depends on individual circumstances and may be subject to change in the future. You must be 18 to 39 years old to open a Lifetime ISA, and the account must be open for at least 12 months before being used to buy a home. Ineligible withdrawals may return less than paid in.
1. Lifetime ISA
For first-time buyers 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, and the government will boost your savings by 25% for free. Max out your account for 5 years, and that's a whopping £5,000 in government bonuses!
There are a couple of important eligibility rules to know upfront: savers must be aged 18 to 39 to open a LISA, and the account needs to have been open for at least 12 months before it can be used towards a first home purchase. So the sooner it's opened, the better, even a small initial deposit gets that 12-month clock ticking.
Download a LISA
With Tembo's Lifetime ISA you can unlock competitive interest rates, while also having access to the governments LISA bonuses.
What are the types of Lifetime ISAs?
There are two types of LISAs to choose from: a Cash LISA and a Stocks & Shares LISA. With a Cash LISA, savings earn interest at a rate set by the provider. With a Stocks & Shares LISA, the money is invested in the stock market instead, so the value can go up or down, and there's no guarantee of getting back more than what you put in.
The right choice depends on your buying timeline and attitude to risk. If you're planning a home purchase within five years or less, a Cash LISA is usually the safer option, since the money is protected and ready when it's needed. A Stocks & Shares LISA is better suited to longer-term goals of around ten years or more, where there's time to ride out any dips in the market.
It's also worth remembering that withdrawing LISA savings for anything other than a first home purchase (on a property worth £450,000 or less) or retirement triggers a 25% government withdrawal penalty on the amount you withdraw. This means you could get back less than you put in. So it's best not to put money in a LISA that might be needed for short-term costs or emergencies.
Past performance is not a reliable indicator of future results. Capital at risk.
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 as 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
Download our Cash ISA
With the Tembo Cash ISAs, you’ll earn hundreds more in interest over 5-years vs saving with the Big 4 banks! Plus, as a Tembo saver you will unlock fee-free mortgage advice when it comes time to purchase a house.
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 may require a current account with the same provider.
One useful tip: it's worth keeping house deposit savings in a dedicated, separate account from everyday spending money. This makes it much easier to track progress towards a savings goal and helps avoid the temptation of dipping into the deposit fund for day-to-day expenses.
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 it 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:
| Taxpayer band | Tax-Free Interest Allowance (PSA) |
|---|---|
Basic rate | Up to £1,000 per year |
Higher rate | Up to £500 per year |
Additional rate | £0 (No allowance) |
To help stay on track, it can be really helpful to set up a standing order that automatically moves money into the savings account each payday. That way, saving becomes a habit rather than something that relies on willpower each month. Even small, consistent contributions add up over time.
Perfect for you: Best savings accounts in the UK
4. Fixed savings accounts
If you have a clear timeline for buying, say, two or three years from now, and the deposit money won't be needed before then, a fixed savings account could be a smart choice. Locking money away for a set period often means earning a better interest rate (on larger sums) than with an easy-access account, although this isn't guaranteed. Options include a Fixed Rate Cash ISA, with terms of one, two, three or more years. It all depends on 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 sit somewhere between easy-access and fixed savings accounts. They tend to have higher interest rates on larger amounts 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.
6. HomeSaver and HomeSaver Cash ISA
Tembo now offers two ways to save towards your mortgage and earn a boosted rate: HomeSaver, our general savings account, and the HomeSaver Cash ISA, for those who'd rather their interest was tax-free.
Both work the same way: Earn up to 5.5% AER (variable) on your savings when you choose to complete a mortgage or remortgage through Tembo.
When you use our award-winning mortgage service, the 12-month bonus is unlocked and paid into your HomeSaver or HomeSaver Cash ISA account. That means you can earn interest while you save (tax-free with the Cash ISA) and get expert support when it's time to secure a mortgage - all in one place. In fact, we’re so confident in what we do, we back it with a Best Mortgage Deal guarantee
5.5% AER (variable) available on HomeSaver Cash ISA includes conditional bonuses: Comprising a 3.0% AER variable base rate and a conditional 1-year 2.5% AER (Fixed) HomeSaver bonus payable after 12 months if you complete a mortgage through Tembo Money Limited within 3 years. The account must remain open until the bonus is paid. One HomeSaver bonus is payable per mortgage.
Download the Homesaver Cash ISA
If you're saving for a mortgage, Tembo's Homesaver Cash ISA lets you earn interest while you save (tax-free with the Cash ISA) and get expert support when it's time to secure a mortgage.
