Are savings in an ISA or Premium Bonds the best route for a mortgage deposit? Many UK residents face this exact choice: tax-free interest and guaranteed modest returns, or a low-risk prize-based product with no tax on wins but no guaranteed yield. This guide focuses solely on Mortgage deposit strategy: ISA vs Premium bonds and gives clear, practical guidance for short- and medium-term saving horizons.
Key takeaways: what to know in one minute
- Choose a Lifetime ISA (LISA) first if eligible: a LISA gives a 25% government bonus on contributions up to £4,000 a year, which normally beats Premium Bonds or a Cash ISA for a first-time buyer saving a deposit.
- If LISA is not available, a Cash ISA usually gives a more predictable outcome: cash ISAs offer a known AER; Premium Bonds give an equivalent expected return only on average but with high variance.
- Premium Bonds are liquid but unpredictable: capital is safe with NS&I, but there is no guaranteed interest — the prize fund is variable and outcomes are probabilistic.
- Lenders accept both if funds can be evidenced and encashed in time: Premium Bonds must usually be cashed and documented prior to completion; ISAs are straightforward if transferred or withdrawn with records.
- Inflation and timing matter: for deposits needed within 6–36 months, prioritise predictability and documented proof of funds over a small chance of a big windfall.
Is an ISA or premium bonds better for a mortgage deposit?
Primary decision factors for a mortgage deposit: safety of capital, predictability of value at the time of mortgage application/completion, ease of proving and transferring funds to a lender, and any additional incentives (for example, the LISA bonus for first-time buyers).
- For short timelines (under 12 months), prioritise predictability: choose accounts with guaranteed rates (high-rate cash ISAs or short-term fixed-rate accounts) because lenders and conveyancers require clear, accessible funds. Premium Bonds are secure but unpredictable — a saver could end up with returns below inflation or none at all.
- For medium timelines (12–36 months), consider a mix: a core in a cash ISA for guaranteed growth and demonstrable funds, with a smaller sum in Premium Bonds if the saver values the chance of a tax-free prize.
- For first-time buyers, LISA is generally superior up to the allowance because of the 25% bonus on contributions up to £4,000 a year. The effective return from the bonus often outstrips ordinary ISA interest or the expected premium bonds returns.
Practical checklist for a deposit strategy:
- Confirm the mortgage broker or lender’s rules on acceptable proof of deposit.
- Keep the majority of the deposit in a vehicle with guaranteed, documented value one month before exchange of contracts.
- If using Premium Bonds, plan for encashment time (NS&I current processing times) and provide the sale/encashment evidence to the lender.
Sources for product rules: HMRC / gov.uk ISAs, NS&I Premium Bonds.
Tax-free ISAs vs premium bonds: returns compared
Compare the nature of returns rather than single-year rates. Cash ISAs pay a stated AER (annual equivalent rate) which is guaranteed for the term advertised. Premium Bonds use a prize fund; the expected (average) return equals the prize fund rate, but individual outcomes vary widely.
- Expected return: for a given year, the mean return of Premium Bonds equals the published prize fund rate. However, variance means many holders get nothing while a few win large prizes.
- Predictability: cash ISA returns are predictable and compound monthly or annually according to the product terms. Premium Bonds have no compounding interest — prizes are paid into the Premium Bonds account and can remain invested or be withdrawn.
- Tax treatment: both Cash ISAs and winnings from Premium Bonds are tax-free in the UK. There is no tax on prize wins and ISAs are sheltered from income tax.
Indicative scenario (example calculations: illustrative only):
- Regular saving plan to reach a £20,000 deposit over 36 months with monthly contributions of £555.56.
- Cash ISA at 3.0% AER (monthly compounding) → approximate final value: £20,890.
- Expected value with Premium Bonds at a 2.5% prize fund (expected return) → approximate expected final value: £20,750 but with wide dispersion around that mean (many outcomes lower, some much higher).
These numbers are illustrative and indicative at time of writing. For product rates see HMRC / gov.uk and NS&I.
Accessing your cash: ISA versus premium bonds withdrawals
Ease of access and speed are vital when a mortgage completion date is fixed.
- Cash ISA withdrawals: immediate or same-day in many online ISAs; for some fixed-term ISAs there may be penalties or loss of interest for early withdrawal. Transfers between ISAs must follow transfer rules to retain tax benefits.
- Premium Bonds encashment: NS&I can usually cash bonds and transfer funds to a bank account within a few working days if requested online; for large holdings or by post it may take longer. For a mortgage deposit, plan to encash well before completion to provide bank statements showing cleared funds.
Practical steps when funds are needed for exchange/completion:
- Start any encashment or account closure process at least 7–10 working days before completion; some lenders expect cleared funds in the buyer’s account.
- If funds are in a LISA, ensure the withdrawal is used for qualifying house purchase and prepare the LISA withdrawal paperwork; penalties apply if withdrawing for other reasons.
- Keep clear records: transfer confirmation, bank statements showing cleared funds, and receipts from NS&I where applicable.
Risk and rewards: chance prizes versus ISA interest
Risk profile comparison:
- Premium Bonds: capital preservation (backed by UK Government via NS&I), highly variable returns, no guaranteed interest rate, chance-based upside. Good for savers who value the lottery-like potential and who accept uncertainty.
- Cash ISA: capital preservation with guaranteed interest (subject to provider terms), low volatility, predictable growth. Better where hitting a specific savings target on a timetable matters.
Psychology and utility: Premium Bonds can be attractive because of the excitement of prizes and tax-free windfalls. However, when a specific financial objective — a mortgage deposit — has a deadline, the utility of a potential large prize does not replace the value of a guaranteed balance.
Do lenders accept premium bonds or ISAs as deposit?
Short answer: yes, but with conditions.
- ISAs: widely accepted. Lenders expect documentation showing ownership and transaction history; transfers between ISAs are acceptable if properly documented. A LISA is accepted for qualifying first-time buyer purchases if used correctly and with the required proof of the bonus.
- Premium Bonds: accepted as proof of deposit once encashed. Most lenders will require the bonds to be sold and proceeds to be shown as cleared funds in the buyer’s account prior to exchange. Lenders will want to see that funds are in the buyer’s control and are not borrowed. Some brokers/lenders may ask for a letter from NS&I or a stamped statement.
Practical lender checklist:
- Ask the mortgage adviser which forms of evidence are acceptable (bank statements, NS&I transaction receipts, ISA statements). Keep communications in writing where possible.
- Encash Premium Bonds early enough to provide clearance and statements.
- For LISA claims, ensure the solicitor has the necessary LISA closure and bonus evidence details in time for completion.
Authoritative guidance: MoneyHelper provides practical guidance on proof of deposit and LISA usage: MoneyHelper.
Tax, inflation and real returns: ISA vs premium bonds
Real returns matter: nominal interest or prize fund rates less inflation gives the real purchasing power of the deposit at the time of purchase.
- Cash ISA: known nominal rate minus inflation = real return. If inflation exceeds the ISA rate, the depositor loses real purchasing power.
- Premium Bonds: the expected nominal return equals the prize fund rate; again subtract inflation. The distribution of outcomes means many savers will end up below the prize-fund mean.
Key implications for mortgage deposits:
- If inflation is high and the deposit timeline is short, neither product protects fully; prioritise preserving nominal capital and ensuring funds are available for the purchase rather than chasing higher but riskier nominal returns.
- For longer horizons, consider shifting to higher-returning vehicles (e.g., stocks & shares ISA for horizon beyond five years) — but that is outside the immediate mortgage deposit decision unless the buyer’s timeframe allows it.
Practical comparison table: ISA vs Premium Bonds for mortgage deposit
| Feature |
Cash ISA (or LISA where applicable) |
Premium Bonds (NS&I) |
| Capital protection |
Yes (protected by FSCS if held at a bank; LISA rules apply) |
Yes (NS&I backed by HM Treasury) |
| Predictability |
High (stated AER) |
Low (chance-based prizes) |
| Tax treatment |
Tax-free |
Tax-free |
| Suitability for short-term deposit |
High |
Medium (needs encashment & luck) |
| First-time buyer bonus |
LISA: 25% bonus (if eligible) |
Not applicable |
| Ease of proving funds to lender |
Straightforward |
Acceptable once encashed; needs evidence |
| Best for |
Meeting a deadline with certainty |
Savers who prize the chance of large tax-free wins |
Deposit decision flow
Which product suits a mortgage deposit?
1️⃣
Is this a first-time buyer purchase?
Yes → consider LISA (25% bonus). No → go to 2.
2️⃣
Is the completion date within 12 months?
Yes → prioritise cash ISA or fixed account for certainty.
3️⃣
Want some chance-based upside?
Place a small portion in Premium Bonds but keep main deposit in ISA.
✅
Outcome
Document funds, encash Premium Bonds early, and use LISA where eligible.
Advantages, risks and common mistakes
Benefits / when to apply ✅
- Use a LISA if first-time buyer and the purchase is within the LISA rules — it often yields the best effective return for deposit saving up to the allowance.
- Use a cash ISA for predictable growth and simple proof of funds for lenders.
- Use Premium Bonds for a secondary pot where the saver values the possibility of a tax-free windfall without risking capital.
Errors to avoid / risks ⚠️
- Relying on a Premium Bond win to meet a deposit deadline — the odds make this an unsafe plan.
- Forgetting LISA closure/bonus timing and paperwork; missing the required evidence can forfeit the bonus or cause delays.
- Encashing Premium Bonds at the last minute; delays in processing can disrupt completion.
Frequently asked questions
Can premium bonds be used as proof of deposit?
Yes. Lenders accept Premium Bonds once they are encashed and the proceeds appear as cleared funds in the buyer’s bank account. Start encashment early and keep NS&I receipts.
Is a LISA always better than Premium Bonds for a first-time buyer?
Generally yes up to the LISA allowance because the 25% government bonus on contributions is a guaranteed uplift that usually outperforms the expected prize-fund return.
Do premium bonds carry any risk to capital?
No — Premium Bonds are backed by HM Treasury through NS&I, so the capital is safe. The risk is in the variability of returns, not capital loss.
How long does NS&I take to cash Premium Bonds?
Processing times vary; online encashment is faster (often a few working days). Allow at least 7–10 working days before completion to be safe; check NS&I for current timings.
Will a lender accept a transferred ISA as deposit proof?
Yes, but provide statements showing ownership and recent transactions. Transfers must keep ISA wrapper intact — follow provider instructions to avoid tax issues.
If Premium Bonds win a prize, do I need to declare it for tax?
No. NS&I Premium Bond prizes are tax-free, and no tax return is required for winnings in the UK.
If a LISA is withdrawn for non-qualifying reasons, what happens?
A penalty typically applies (a charge on the amount withdrawn); check the current LISA rules on gov.uk.
Should savings for a deposit be split between ISA and Premium Bonds?
Splitting is reasonable: keep the bulk in a cash ISA for certainty and place a smaller portion in Premium Bonds if the saver wants the chance of tax-free prizes without risking capital.
Your next step:
- Check eligibility for a Lifetime ISA and, if eligible, open and prioritise LISA contributions up to £4,000 this tax year.
- Move the core deposit target into a high-rate cash ISA or fixed-term ISA where funds will be needed within 12 months.
- If desired, place up to a modest portion (for example 5–20% of the target) into Premium Bonds but encash early and keep documentation ready for the lender.