Savings account options for first-time buyers

Saving for a deposit is usually one of the first steps on your journey towards being a homeowner, but what type of savings account would suit you? Deciding on the best place to put your money while you save is important, and we hope this guide will help you come up with a savings strategy that works for you.

Here we look at some types of savings accounts and how the different options work.

How much do I need for a deposit

The average buyer puts down a 20% deposit on their first home, which can seem a daunting amount to save. The good news is that there are ways to reduce the amount you need to save to just a 5% deposit. Some options include:

Shared ownership

-As little as a 5% deposit on the value of the share you buy of the property Other upfront costs for shared ownership include:

-Independent financial advisor fees, solicitor’s fees and disbursements

-Reservation fee

The ongoing monthly costs for shared ownership include:

- Mortgage payment

-Property charges for the part of the home you don’t own

-Service charges

Help to Buy

-With a Help to Buy equity loan you can buy a home with a 5% deposit

-You then get a government loan for up to 40% of the purchase price with no charges for the first 5 years

-What’s more, if you save up for your deposit in a Help to Buy ISA, the government will boost your savings by 25%.

-That means for every £200 you save, the government will add a bonus of £50

-The maximum total bonus is £3000 [Read more about Help to Buy ISAs later]

95% mortgages

-95% loan-to-value mortgages are available from commercial lenders

-That means you only need a 5% deposit

-Interest rates will be higher, so you’ll pay more in the long term

-Can help those with a small deposit to get on the property ladder

Once you know how much you need to save to live in the area where you want to buy, work out how much you need to save each month. This handy savings calculator from the Money Advice Service is a good place to start.

Choosing a savings account

Now it’s time to decide where to stash your cash. There are lots of different options, from accounts where you can take out your money whenever you want to, to those designed for saving for the medium to long term. You usually get better interest rates on those that ask you to lock your money away for at least a year, but that’s not always the case. You might find it helpful to have a few different accounts, so you can access some of your money and lock some away.

It’s good to know that, unless you are a higher rate taxpayer, you can now earn up to £1,000 interest a year on your savings before you pay any tax.

Here's an overview of a few savings options that are popular with homebuyers. There’s more information about each later on.

Easy access accounts

Easy access savings accounts andcurrent accounts and are a simple way to save, but don't usually pay the best rates. Even if a current account has a high headline rate, it’s only available up to a certain balance, so it’s no good for building up a big deposit. They are both handy for saving in the short term though.

Regular savings accounts

With most regular savings accounts you have to pay in a set amount once a month and withdrawals are limited. Interest rates are competitive, but most deals end after a year and are only available from the bank you have a current account with.

Fixed rate bonds

With fixed rate bonds you pay in a lump sum and lock it away for a set time – usually one, two, three or five years. The longer you leave your money in, the higher the rate of interest you earn. You are guaranteed a fixed return at the end of the term, so it's a very safe option.

Help to Buy ISA

As with all ISAs, the interest you earn in these is free from income tax, even if you are a higher rate taxpayer. With a Help to Buy ISA if you are a first-time buyer, the government will add a 25% bonus to your savings once you get to £1,600. The maximum bonus is £3,000.

Lifetime ISA

With a Lifetime ISA you get interest free from income tax and a 25% bonus from the government – up to £1,000 a year – as long as you are using the money to buy your first home or retire.

Current accounts

A highly flexible bank account that allows you to access a range of banking services, such as receiving your salary or pension, paying bills and setting up direct debits. Many of the best current accounts offer high interest rates, cashback, spending rewards and competitive overdraft rates. If you switch current account you can earn up to £100 cashback, just make sure you apply for one that suits your needs.

Cash ISAs

The interest you receive is free from income tax and the savings interest up to £1000 is tax-free unless you are a higher rate tax payer, but there’s a cap on how much you can pay in over a tax year. You can choose from a variable rate or fixed rate ISA. With a fixed rate ISAs you earn a guaranteed interest rate, but you have to pay in a lump sum and can’t make withdrawals.

Stocks and shares ISAs

Everyone over 18 has a £20,000 allowance for the tax year. A stocks and shares ISA is very different to a cash ISA, which is simply a savings account you never pay tax on. This is investing your money into an account that has charges a cash ISA doesn’t; primarily a platform and fund manager charge. Historically stocks and shares ISA’s have greater returns than a cash ISA, but require longer-term investments of 5 years or more.

Let’s take a look at some of these in more depth.

 Help to Buy ISA

If you save for your first home with a Help to Buy ISA, the government will boost your savings by 25%. Help to Buy ISAs are available from many banks and building societies and are designed to help you save for a mortgage.

Ideal for:

Buying with a friend, family or partner. If they’re a first-time buyer, they too can open a separate Help to Buy ISA and save the same amount.

Minimum/maximum savings:

• You can save up to £1,200 in the first month after opening the account, and then up to £200 a month after that.
• You need to save at least £1,600 in your Help tHelp to Buy ISA before you qualify for the minimum government bonus of £400.
• The 25% is paid on any savings amount between £1,600 and £12,000, but you can save more than this if you’d like to.

Need to know:

• The government will add a 25% bonus to your savings when you use the money to buy a home
• This bonus is only available for properties worth up to £250,000 outside London, or £450,000 in London.

You can open a Help to Buy ISA at all the major high street banks as well as smaller financial institutions and online-only banks. It’s worth talking to your own bank about what they can offer.

Lifetime ISA (LISA) 

Lifetime ISAs are very similar to Help to Buy ISAs, with the government adding money based on what you save.

Ideal for:

They are designed for first-time buyers and also those saving for retirement.

Minimum/maximum savings:

• You can put in up to £4,000 per tax year as part of your £20,000 ISA limit
• The government will add a 25% bonus to your savings, topping up your balance by up to £1,000 a year.

Need to know:

• You must be between the ages of 18 and 40 to open a Lifetime ISA
• The property you buy must cost less than £450,000
• There’s a 25% charge to take money out of a Lifetime ISA, unless you are using it to buy your first home or you’re over 60.
• You must be buying a property with a mortgage, using a conveyancer or solicitor

Lifetime ISAs are an excellent way to save for a house, but you need to be sure you can afford to leave your savings in the account until you have saved enough for a deposit.

Find out more about Lifetime ISAs from the government website.

Lifetime ISAs are quite new, so there aren’t many available yet. If you think they may suit you, get in touch with your bank and see if they offer one, or use the link above to look at the options.

*Unless you’re using it to buy your first home or over 60

**Bonus limit is £1,000 a year

Fixed rate bonds

A fixed rate bond can help you save for a mortgage. You earn a guaranteed amount of interest in return for paying a lump sum and locking your money away for a set time.

Ideal for:

Those looking to get a guaranteed return on a lump sum, as it pays a guaranteed amount of interest for a set length of time.

Minimum / maximum savings:

• Usually anywhere from £500 and potentially up to £2,000,000

Need to know:

• You need to be sure you can afford to lock your money away for at least one year.
• If you take out money before the term ends, you will lose interest and may lose some of your original investment
• The longer you put your money away for, the better the interest rate.

There are plenty of fixed rate bond to choose from at the big banks and smaller providers, so it’s worth doing some research to find one that suits you. Some banks offer exclusive deals for existing account holders, so you could start by getting in touch with yours.

(Reference: Money Supermarket)

Easy-access savings accounts 

An easy-access savings account does what it says on the tin. You can access your money at any time, but the interest rate is usually lower than with other options. Another thing to consider is whether being able to take out your money might be too tempting when you’re trying to save for a deposit.

Ideal for:

Someone looking for a flexible savings account that lets you dip in and out.

Minimum / maximum savings:

• They can usually be opened with £1
• Up to £5,000,000 or more

Need to know

• You can usually get immediate access to your money whenever you want
• Interest rates are generally lower than other alternatives. Most providers offer less than 1% AER and according to the Bank of England data, the average is 0.14% AER.
• A balance of £10,000 in an average easy access savings account would only pay £14 of interest in a year before tax
• You will need to look hard, but some easy access savings accounts pay up to 1.3% AER – on a balance of £10,000 that is £130 a year before tax.

You may also come across limited access savings account. These work in much the same way as easy access accounts, but there are limits on how often you can access your savings without paying penalties.

What to do next

Once you have read this article, we recommend some additional reading below, so you have all the information you need to decide on your savings strategy.

If you feel shared ownership could help you to get on the property ladder, read our shared ownership explained article.

If you have any questions about shared ownership, please contact the So Resi team who will be happy to help.

Additional reading:

To help you make the right decision for you, here are some other articles and resources to look at:

https://www.gov.uk/affordable-home-ownership-schemes/help-to-buy-isa

https://www.moneyadviceservice.org.uk/en/articles/top-tips-for-choosing-savings-accounts

https://www.moneysavingexpert.com/banking/

Important: Thames Valley Housing is not a financial advisor and this article does not constitute financial advice. All financial decisions should be carefully considered and you should seek the help of a qualified, independent professional where necessary.

Any mention of specific brands, retailers or banks should not be taken as an endorsement of said entity and does not constitute any form of partnership with said entities.

NB. All figures, interest rates and offers valid at the time of publishing.