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Saving for your first home: best bank accounts and strategies

Saving for your first home: best bank accounts and strategies

There’s no shortcut for saving for a deposit – but some routes are faster than others. We explain the best options.

Sam Richardson

Mortgages and Home

Sam Richardson
Updated on 23 August 2018

Planning to buy a home, without a strategy to save, is like hoping to win the lottery without buying a ticket.

That’s because not all savings strategies are equal and simply spending less is unlikely to be enough.

You need your money to grow, because if it’s not growing faster than inflation than it’s shrinking.

Plus, you could be missing out on thousands of pounds in bonuses from the Government, all of which will make a real difference when you look for a mortgage.

In this article, we look at the most efficient ways to save for a deposit, whether you want to buy soon or you’re just starting to save.

This article is part of a series on buying your first home: click here for more. 

How much to save

Ignore the terrifying prices in the newspapers – how much you need to buy a home depends largely on where and what you’re buying.

To get an idea of prices, try looking at properties in your area on Rightmove and Zoopla.

Then look at our article on mortgage deposits: you may only need 5% of the property’s value to get a mortgage, or even less in some cases.

Have a look at prices where you want to buy (image: Shutterstock)

Once you know how much you need to save, work out how much you can save.

The independent Money Advice Service has an easy to use budgeting calculator to work out how much you’ll be left with at the end of the month.

Be realistic with your saving goals: if there’s too much month left at the end of your money, then the cost of overdrafts and credit cards could quickly wipe out your saving gains.

When do you want to buy?

This is really important because how you save is quite different depending on when you want to buy. If you’re looking to buy soon, skip to our ‘Buying within five years’ section now.

Buying more than five years from now

This section is for you if you’re only just starting to save money and won’t be buying for at least five years.

First step: get a stocks and shares Lifetime ISA.

A stocks and shares Lifetime ISA is a way to save money, up to £4,000 a year. It has three advantages over savings accounts for prospective first home buyers:

Firstly, it’s tax-free so you never need to worry about the taxman.

Secondly, the Government will give you 25% bonus on whatever you save, up to £1,000 extra per year. If you can save £20,000 over five years, then you’ll get a £5,000 bonus.

Finally, as it’s an investment you can grow your money faster than in a savings account. Over five years that extra interest can really make a difference.

Putting in the maximum £4,000 in every year for five years, with a return of 5%, you’d end up £30,623 in total: well on your way to a deposit given today’s housing prices (although these could change).

You pay your taxes, so why not take this opportunity to get some money back from the Government?

You pay taxes - so why not get some money back from the Government? (image: Shutterstock)

Set up a regular monthly transfer so you never have to remember to put money in your LISA, and make sure you raise that transfer if your salary goes up.

LISA’s have plenty of restrictions. If can only be used to purchase properties worth up to £450,000 – otherwise, if you withdraw it before you’re 60 you’ll have to pay a 25% penalty. Read more about them here.

Do note that a LISA is an investment: your money can go up and down. If you’ve never invested before, consider a robo-advisor, which can put together a portfolio based on your aim of buying a property.

If you really don’t like takings risks with your money, get a cash Lifetime ISA instead – your money’s completely safe, you’ll still get the Government bonus, but the return isn’t nearly as good.

Second step: get a regular savings account

After putting away £4,000 a year in your LISA, if you’ve got money left over each month you should put it in a regular savings account.

These pay up to 5% interest, more than enough to beat inflation, providing you can put a certain amount every month for 12 months, without withdrawing any. You can usually save between £25 to £300 a month but this varies by provider – set up a regular transfer from your current account.

At the time of writing, First Direct, HSBC, M&S Bank, Nationwide and Santander offered 5% regular savers.

To access these, you need a current account with those banks, although it’s relatively easy to set up one and you could get free cash, vouchers, gadgets and more for joining.

Follow loveMONEY on Twitter to get updated on the best savings rates, and first-time buyer tips and more

Buying within five years

This section is for you if you’re looking to buy soon and assumes you already have some savings.

First step: open a cash Lifetime ISA

A cash Lifetime ISA (LISA) is a way to save money, up to £4,000 a year. Its main advantage is the Government will give you a 25% bonus on whatever you save, up to £1,000 a year.

Using your existing savings, put £4,000 (if you can manage it) straight into the account. Make a note in your diary for the anniversary, when you can put in another £4,000, every year until you buy a property.

Please note that you’ll only get the bonus for buying a property up to £450,000 – and if you withdraw it in other circumstances before you’re 60, you’ll have to pay a 25% penalty. Read more about Lifetime ISAs here.

Second step: maximise your existing savings

If your existing savings are sitting in your current account, or in an old savings account in a high street bank, they are unlikely to be earning much interest.

The best savings accounts are now largely accessed online or by mobile app and you may never have heard of the provider - just make sure they're covered by the FSCS £85,000 guarantee.

You're likely to get the best savings rates online (image: Shutterstock)

Transfer them to a savings account or fixed-term deposit, depending on when you’ll need to access the money.

We’ve listed the top savings accounts here.

Third step: get a regular savings account

Once you’ve filled up your cash LISA, open a regular savings account.

These pay up to 5% interest, more than enough to beat inflation, providing you can put a certain amount every month for 12 months, without withdrawing any. You can usually save between £25 to £300 a month but this varies by provider – set up a regular transfer from your current account.

At the time of writing, First Direct, HSBC, M&S Bank, Nationwide and Santander offered 5% regular savers.

To access these, you need a current account with those banks, although it’s relatively easy to set up one and you could get free cash, vouchers, gadgets and more for joining.

Got some savings together? Now read our article on deposits and what you can afford.

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