One of the biggest returns from investing in property is CASHFLOW. The net profit that is coming into your pocket every month. The question is where you want to put it.
This weeks requested article will cover the different ISAs on the market today.
First, what is an ISA.
An ISA, an Individual Savings account, is basically the same as a standard savings account except you never pay tax on the earnings e.g. interest (but also dividends, capital gains for the Stocks & Shares ISA. Coming onto later).
The annual allowance for ISAs, the amount you can deposit that isn’t eligible to get taxed, is £20,000. This doesn’t mean the max for the account is £20,000, for instance if you put in £5,000 every year you could continue to put into the same account even after reaching the £20,000 mark.
The standard Cash ISA
The standard cash ISA is just a savings account you don’t pay interest on, same as above. No more, no less.
They do have a couple of types which are;
Easy Access vs Fixed Rate
Flexible vs Non-Flexible
First, Easy Access vs Fixed Rate…
This is to do with you withdrawing your money.
An easy access account is one where you put money in, take it out. No drawbacks, fees or issues.
A fixed rate account on the other hand, is one where you put your money into the ISA and then cannot withdraw it. Either for a certain length of time or you have limited withdrawals during a period e.g. You cannot withdraw for 6 months or you may only get 2 withdrawal opportunities every 12 months.
Doing so regardless would then incur potential fees or lowering of the interest rate on the account.
The question is - why would you pick a fixed rate?
The normal reason is that the account provider will offer a higher interest rate on the accounts, but there is also personal preference or circumstance. You may be saving for a project, or for your son or daughter’s university costs down the line and want to make sure you don’t go near that money. In that case this could be helpful if you struggle with budgeting.
My opinion between the two is that in the current market the interest rates are pretty shocking, and the value you have in easy access to your money in potential change of circumstances is greater than the extra few pounds you may get in a slightly higher interest rate, so I wouldn’t choose a fixed rate for that reason.
In the case of saving for something of value or preparing for costs down the line but struggle with budgeting. The fixed rate can be a good tool for you to use as long as you have a good idea that you won’t need quick access to the money soon, say less than a year.
Now, Flexible vs Non-flexible…
This is to do with your annual personal allowance talked about earlier.
A flexible account, like your easy-access account, is one where you can put your money in and take it out with no issues or worries with your allowance.
On the other hand, a non-flexible account is one where every time you put money into the account it reduces the allowance permanently for the year.
What does this mean…
Say you have a flexible account, you deposit £2,500 into your account. Your allowance remaining would be £17,500 (Calcs: £20,000 – £2,500 = £17,500), but perhaps you then needed the money back tomorrow. You take the £2,500 out and your allowance then goes back to £20,000.
With a non-flexible account, once that £2,500 has been deposited, your allowance for the year has been reduced to £17,500 permanently. This means if you took it out and put it back in immediately your personal allowance remaining would then be £15,000 (Calcs: £17,500 - £2,500 = £15,000).
Why choose a non-flexible then…? Again, the normal incentive is slightly higher rates.
If you are not going to be going near your total allowance this may be good for you, but if you are expecting to approach the max limit or are close to it on an annual basis, then
I would say stick with a flexible just in case, especially if you have more than one type of ISA.
Help to Buy ISA
The Help to Buy ISA is basically a regular savings account with perks attached.
These being (For first time buyers only);
Once you have reached £1,600 you can get 25% tax free bonus from the government up to the max of £12,000 to help with the purchase, meaning you could get a bonus from the government from £400 to £3,000. (Calcs: £1,600 * 0.25 = £400, £12,000 * 0.25 = £3,000).
Now this bonus CANNOT be used at the exchange deposit stage of buying the property, this is the point where you and the vendor exchange contracts and you put a deposit down to secure the house.
What it CAN and is used for, is the mortgage deposit. This is the deposit the mortgage provider requires for them to loan the remaining cost of the house to you.
So, in the case of a standard 75% LTV Buy-to-let mortgage, where you can receive a loan/mortgage for 75% of the property, providing you fund the 25% deposit, the bonus can be used for that 25%.
You have a £150,000 house to buy. You have £12,000 in your Help to Buy ISA.
The bank wants a 10% mortgage deposit on the property so needs £15,000. The £3,000 bonus from the HTB ISA can be used to fill the gap in between the £12,000 and the £15,000 deposit required, and suddenly your living in your new home.
Now a couple of quick points to note.
You can only save £200 a month, except the first month in which you can save £1,200. This does make the saving to the full amount take quite a bit of time. Do remember that at any time after saving £1,600 you are able to receive 25% which could only take 3 months (1st month £1,200, 2nd month £1,400, 3rd month £1,600), so you don’t necessarily have to wait until you save to the max figure.
You don’t necessarily need to buy a house with the money. You could just use this account to save money as it may have a better interest rate than your regular saver. You can save in this account for long also, as many regular savers revert to standard savers after 12 months.
To all the couples out there, the account is personal to you which means both you and your partner can set up a Help to Buy ISA each. Save up, and then jointly purchase the house and you would get the bonus from both accounts e.g. you both set up an account, both save the £1,600 in three months. Both of you get the £400 bonus, leaving you with a total figure of £4,000 to buy your first property.
A lifetime ISA is relatively new, only coming out last year (2017 to all you who are reading in the far future 😊).
Now this ISA was created for a couple of potential purposes,
To use as a savings account for the deposit as a first-time buyer, and/or
Savings for retirement.
(I say and/or, as you can use it to build a deposit and then use it to start saving for retirement)
With a LISA (Lifetime ISA), you can save £4,000 a year within this account, either by lump sum deposit (all being paid at once), or over time.
You receive a 25% bonus on that amount every tax year (06 April 2018 – 05 April 2019), and subsequent bonuses take into account bonuses previously added to your total. E.g. £1,000 in the account, 25% bonus and you have a total of £1,250, your next 25% bonus will be on the overall £1,250.
Now this overall looks great, however there is a couple of downsides with the LISA (potentially).
First, a LISA is unfortunately age-restricted to only those between the ages of 18 – 39 being able to open a new account.
Secondly, If you withdraw money from the account for any reason other than for retirement or for your first-time home, you will be charged a penalty of 25%.
E.g. you have £4,000 in you LISA and withdraw it all suddenly for a reason not associated with purchasing your first-time house nor retirement, you would be hit with a penalty of £1,000 (Calcs: £4,000 * 0.25 = £1,000).
Now if your sole purpose for this account is to save for a home or retirement. Great, this could be just right for you.
In the case of buying your first house and you need or want the flexibility such as having quick access to the cash potentially, you may be better off with a HTB ISA.
Again, couples celebrate because again it is a personal account. So, both of you can save and jointly purchase, with the totals from both accounts going towards the home purchase bonus included.
Unlike a HTB ISA, the bonuses you receive on this account can be used for the home exchange deposit, so this could be really helpful to those needing the cash initially in order to secure that first home.
You do need to have your LISA account open for a year or more, to be able to buy your first home with it.
Stocks and Shares ISA
A stocks & shares ISA is one where you can invest in shares, bonds, funds (potentially more), with the variety depending on which provider you invest with.
The benefit of being tax-free extends further in a S&S ISA with interest payments, dividends and potential capital gains being exempt from tax.
The providers you invest with, will normally offer;
An S&S ISA account that you can purchase and select your own investments from, or
An account where you can invest in pre-made portfolios at various risk levels.
(Most providers offer both, but with the first option you may be more interested in looking towards providers with lower fees and potentially less variety of fees such as entry or exit fees)
Warning: Now whilst this ISA has the potential to provide great returns tax-free, it is also the stock market and those unprepared and even those prepared can lose money. The money invested can both go UP and DOWN. So, I would say people should only put money into this account they are willing and happy to risk and won’t cause damage to their current lifestyle if things start to dip, and even then when they have a good enough idea of what they are doing.
I don’t really have much else to say on S&S ISAs, but I would say for me it’s been a great way personally to get introduced to the stock market and put research into practice.
Again, I stress please make sure you do your research before engaging.
Innovative Finance ISA (or the Peer-to-peer ISA)
This one I couldn’t find much information on with it only be introduced in the last year with limited providers.
The general premise being the lending of your money to individuals for 3-5 years with a guaranteed rate of return given.
Which surprisingly (or coincidently, or both) is similar to the investment model I have to provide great returns to investors through property investing.
In summary, you now know the variety of ISAs currently available, the differences between them both the potential benefits and downsides of each. You should also be able to decide if any are able to help boost your personal finances, and make better decisions when considering your saving options.
Thanks for reading
*This blog was requested as a topic, and being interested in personal finance as well as property investment, I was really interested to write this. I really enjoyed the research into this and knowing at least one person will find some value out of it is an amazing feeling.
If you or someone you know has a property investment or personal finance topic you’d like me to consider writing about, please send me a message on any of my platforms.