Saving up to buy your first home can be a struggle, especially during the cost of living crisis. Whether you’re still building up a deposit, or need to save to cover the extra fees and costs that come with buying a home, it’s possible to build your existing savings with very little effort. By choosing the right bank account, your savings could begin to grow all by itself.
This guide will share some savings options for first-time buyers, and help you to find the solution that works best for you.
First, how much do I need to save for a deposit?
First-time buyers typically put down between a 10-20% deposit on their first home, meaning you would need to save £57,000 to put down a 20% deposit on the average home in the UK (valued at £284,691[1]) – and this figure could be even higher in some parts of the country, such as London.
It is possible to put down a smaller deposit on your home using Shared Ownership, which requires deposit of as little as 5% on the share you’re buying.
Let’s take a home worth £300,000 as an example.
- Your 25% share would be 75,000.
- A 5% deposit would be just £3,750.
What savings options are available to me?
Choosing the correct savings account could help you to earn hundreds of pounds each year on your existing cash. There are plenty of different options for you to choose from, depending on your own goals and spending. We’ll explain some of the most common options available.
Click the links below to jump to the relevant sections within the article.
Regular Savings Account
How does it work?
This is a type of account that will help you to build up your savings. These accounts often have lots of rules and stipulations, but the payoff is that they generally offer higher interest rates than traditional fixed or easy-access savings accounts.
Regular savings accounts usually ask you to deposit a set amount each month, and can limit the amount of withdrawals you can make within the fixed term. The savings rate usually expires after a year, so make sure to shop around when your term is up.
Who’s it for?
- Someone with a fixed income and set outgoings, so they know they can meet the monthly deposit requirements.
- Someone who doesn’t need their money back within a fixed period of time.
Need to know:
- Regular accounts usually only allow you to save a smaller amount each month, so open a few at the same time across different accounts to maximise savings.
- For basic rate taxpayers, you can earn up to £1,000 tax-free on your savings from a regular account. For higher-rate taxpayers, that figure is £500.
Lifetime ISA
How does it work?
A Lifetime ISA (also known as a LISA) is a special type of savings account that provides a 25% boost to your savings. This account allows you to save up to a maximum £4,000 each tax year (6th April – 5th April the following year), and for every pound you save, the government will pay 25p into your account. This means that you could gain up to an extra £1,000 each year, just by saving in this account. First-time buyers can use the money and bonus to buy a home valued up to £450,000.
Who’s it for?
- Anyone aged between 18 and 29.
- First-time buyers.
Need to know:
- You must be a first-time buyer to be able to use the LISA savings towards your home purchase.
- The property you are buying must be valued at £450,000 or below to use your LISA contributions.
- If you do not meet the criteria to withdraw the funds, the money can be used to support your retirement when you turn 60.
- If you really need to withdraw your money for any other reason, you will face a 25% penalty.
Help to Save
How does it work?
Help to Save is a specialist savings account for low paid workers. It allows you to save between £1 and £50 each month, and at the end of two and four years you receive a 50% bonus up to a maximum of £1,200. This account won’t make you huge savings, but if you’re putting away little and often, then you will cash in over the long term. You can also withdraw your savings anytime you need.
Who’s it for?
- Low-income earners receiving universal credit or a working tax credit.
Need to know:
- This account has a funny quirk. The 50% bonus within the first two years is paid on the highest amount during that period, not the amount at the end. For example, if you saved £500 in the account over two years, but had to withdraw £300 in the meantime, you will receive the bonus based on £500.
- During years three to four, the bonus is paid on the difference between the highest balance in years one to two, and years three to four.
- For example, let’s say you saved £500 in the first two years, and then withdrew it all. Then, in years three and four, you saved £1,000 in the account. At the end of year four, you would get a £250 bonus. This is calculated as £1,000-£500=£500, the bonus being 50% of the difference between the two highest balances.
Cash ISA
How does it work?
This is a type of savings account that offers tax-free interest on your savings. Cash ISAs allow you to contribute up to £20,000 each tax year. You can either set up an instant access Cash ISA, which allows you to withdraw money when you want to, or a fixed-term Cash ISA, which locks your money away for a set period of time, and you can only withdraw at the end of that term.
Check with your local bank, or visit Money Saving Expert to compare the best Cash ISAs on the market, each bank will have its own stipulations.
Who’s it for?
- Anyone over the age of 16.
- First time buyers looking to make the most out of their savings.
Need to know:
- You can only open one Cash ISA each year, but you can transfer to another Cash ISA with another provider during the tax year.
- You may have to pay a penalty if you withdraw your cash early from a fixed-term account.
- Remember, your £20,000 tax free limit applies to all of your ISAs combined, so be careful not to go over this total if you are saving across a number of accounts.
Stocks and Shares ISA
How does it work
A Stocks and Shares account is a type of ISA (individual savings account) that sees your money saved in investment funds or bonds. This means that your savings are used to purchase shares in a company or number of companies, or a bond, which is a loan to a company or a government. The value of your shares goes up and down with the stock market.
Who’s it for?
- Ideally, someone that would be happy to leave their money in a savings account for the long term. If you need to access your money or make quick gains, this account isn’t for you.
Need to know:
- The value of investments can go up and down – only save money in these accounts that you would be prepared to lose.
- Speak to a financial advisor if you have any concerns before investing in a Stocks and Shares ISA.
- You can only pay into one Stocks and Shares ISA for each tax year, so choose wisely.
Premium Bonds
How does it work?
A slightly different type of product, Premium Bonds are an investment tool issued by the National Savings and Investment, where you are entered into a monthly prize draw to win between £25 and £1 million tax free. You don’t earn any interest in premium bonds, meaning your savings won’t grow with inflation and may actually be worth less over time
Who’s it for?
- Anyone over the age of 16.
- Someone who doesn’t mind earning interest on their cash.
Need to know:
- You need to invest at least £25.
- You receive a bond number for every £1 invested, so if you save £25, you will receive 25 bond numbers (each number offers a chance to win a prize).
- The monthly prize is not guaranteed, so please don’t expect to win!
- Withdrawing from your premium bonds is not fast – it can take around 3 days for your funds to reach your account.
What next?
If you think you know which bank account is right for you, now is the time to start looking around. Comparison websites such as Money Saving Expert do regular, comprehensive summaries of the best accounts out there, comparing interest rates, any rules or stipulations, and returns.
If you're having trouble saving for a deposit, why not consider SO Flexi which allows you to rent a home at a lower-than-market rate, allowing you to save for your deposit.
When you think you might have your deposit ready, why not get in touch? Contact Us.
--
Disclaimer: SO Resi 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 should not be taken as an endorsement of said entity and does not constitute any form of partnership with said entities.
All information is valid at the time of publishing.
[1] https://landregistry.data.gov.uk/app/ukhpi
--
Whilst you're here, take a look at our other blogs for the latest interior trends and our favourite first-time buyer hotspots. You can also stay tuned by following us on Instagram, Facebook, and Twitter.
Written by the SO Resi In-House Team