This article was updated on 3 September 2024
If 2024 is the year you plan to start saving for your first home – there’s some good news. Savings rates are looking good at the moment.
Rising interest rates – which increased from their low of 0.1% in December 2021 to 5% today – may have driven mortgage prices upwards, but they have also helped inflate returns on savings accounts.
If you take a look at the savings accounts on offer at the high street banks you might not notice anything spectacular in the way of rates. But dig a little deeper into building society and challenger bank territory and you’ll discover an array of accounts offering returns at 5%, 6% or even 7%.
What’s more, with inflation falling – it reached it’s target level of 2% in June – the majority of savings accounts have rates which beat inflation. When your savings rate is higher than inflation it means you are seeing real gains, rather than the rate of inflation eroding your earnings.
So, what is the best savings account for first-time buyers? And how do you find the right account for your needs? We took a look at the best accounts on the market right now to help you gain the tools to get into the savings habit.
Fixed rate bonds
What are they? These are savings account with a guaranteed rate of interest for a specified period of time. You can find accounts which allow you fix the rate for anywhere between one year and five years.
Pros: Interest rates are fixed, so it’s guaranteed for the duration. Rates tend to be a little higher on these accounts than for easy access accounts.
Cons: Your money is locked into the account so if you need to access the cash you will be penalised. Many fixed-rate accounts require savers to deposit quite a high sum to open the account – at least £500 and as much as £10k. So, savers starting from scratch may wish to open an easy access first to launch their savings.
Are they a good option for first-time buyer? If you don’t need to access any of your savings and you have some cash already saved to deposit then these can be a good option for first-time buyers. If you have already done the sums and know roughly how much you need to save then you can choose an account with a duration which suits your plans. Although savings rates have spiked in 2023, we are starting to see some falls so locking into a high rate before the market turns could be sensible.
For those of you who like to have some savings for emergencies, you could also open an easy access account separately for unexpected costs.
How to find the best fixed-rate bonds? Keep an eye on our sister website, The Money Pages, for updates on the best deals to hit the market. Savers should make sure they use comparison sites to compare the best deals.
Don’t just look for the best rate – although this is important – but make sure you find the right terms too. If you plan to buy your home in a year’s time, a bond which locks your money in for two-years won’t be practical.
Easy access savings accounts
What are they? These accounts offer variable interest rates and you can save for as long as you wish. You can also withdraw your cash without penalty – sometimes these accounts offer unlimited access but others may limit the number of withdrawals.
Notice accounts are similar in that you will be able to access your money but you may have to give notice of 90 days, for example.
Pros: These are flexible accounts so if you reach your savings goal sooner than expected and want to buy a home, you can access the money without penalty. You can also dip into your savings if you need the cash for an emergency – although this may not be a ‘pro’ for some people.
Cons: Interest rates are traditionally lower on these accounts than on fixed-rate bonds, although in recent times the easy access market has become more competitive. Indeed, the rate can fluctuate so if interest rates start falling, you may see your returns fall too.
Are they a good option for first-time buyers? Because many easy access accounts can be opened with as little as £1 they provide a great starting point for first-time buyer savings. It may be an idea, if you think you’ll need to save for several years, to start off with one of these accounts to build a deposit so you can start saving in a fixed-rate bond.
Make sure you shop around for the best deal and look for options which can be accessed online so you can keep track of how your deposit is building.
How to find the best easy access accounts? Do your research by checking out comparison sites and signing up for alerts. Often the best easy access rates come from challenger banks or building societies to don’t just opt for the account offered by your bank.
Watch out for ‘bonus’ or introductory rates which sometimes only apply for a year. As with all financial products, check the terms and make sure it’s covered by the Financial Services Compensation Scheme (FSCS).
Lifetime ISA
What are they? Lifetime ISAs (LISAs) are designed for first-time buyers so this makes them a great choice for your deposit. You can save up to £4,000 a year and as well as receiving interest you will also receive a 25% bonus from the government. You must be over 18 and under 40 to open a LISA and you can only withdraw the money when you buy your home.
Pros: If you are liable for tax on your interest the ISA wrapper will offer you protection from this. The 25% government bonus, which allows savers to earn up to £1,000 a year, is a real asset making this a must-have for deposit savers.
Cons: As well as age restrictions, and penalties for withdrawals, there is a £450k upper limit on savers’ first properties.
Are they a good option for first-time buyers? Yes, they are designed for first-time buyers and pension savers.
How to find the best Lifetime ISA. Thanks to high interest rates, the best paying cash LISA is currently offering interest of 5% – this comes courtesy of Moneybox.
