The best savings rates for first time buyers

If you're planning to save up for a deposit on a house, here's where to stash your cash.

When I was young I always dreamed of owning a property and setting up home. About a year and half ago that dream came true and I invested in a little flat. Admittedly it's not the mansion I had envisioned, but at least I still own it.

But for many people, the dream of buying their own place still seems a long way off. With many lenders now demanding large deposits, getting a toe, let alone a foot, on the property ladder is a big challenge.

Super savers

If you want to get a half decent mortgage rate these days, you're going to need a deposit of at least 10%. And to get the really really good deals, you're looking at around 25%. That's going to involve some serious saving.

According to Birmingham Midshires, the number of British savers putting money aside for a deposit on a house has gone up by 29% since last July.

In fact, a quarter of British savers aged 25 to 34 are now saving for a property (23%) compared with a fifth in July 2008 (19%). And in the 35 to 44 age group, 10% are now saving for a deposit, compared with 8% back in July.

So where's the best place for first time buyers to stash their cash?

Regular savings accounts

If you fancy putting a regular sum of money into a savings account each month, one option is to open a regular savings account.

Certain lenders offer regular savings accounts specifically aimed at first time buyers. And often these accounts come with bonuses such as fabulous sounding cashback offers.

For example, if you open a First Home Saver account with Natwest, you could receive a whopping £5,000 in cashback! Sounds great - until you discover you'll need to save up a massive £50,000 in order to qualify for the full amount.

What's more - and this is the really big catch - in most cases, if you open one of these first time buyer accounts, you'll be required to take out a mortgage with the lender too. And that means you're probably not going to be getting the best deal on your mortgage.

But in case that's not enough to put you off, the interest rates on most of these accounts are utterly pathetic. The Natwest account only offers a measly 1% AER, while Cumberland Building Society's First Home Saver offers 2.75%.

However, before I tarnish every first time buyer account with the same brush, the Abbey First Home Saver account is worth a look. It offers a much better rate of 5% and you won't be obliged to take out a mortgage with Abbey if you sign up. That said, you will still need to attend a mortgage interview with Abbey to discuss your options (but technically, you could do this and then go elsewhere!).

Even so, I still think you'd be better off opening a regular savings account which isn't specifically aimed towards first time buyers. The Barclays Monthly Savings account, for example, offers a fabulous rate of 6% AER. All you need to do to qualify for this rate is pay in between £20 and £250 a month for one year.

Do note though, this savings account won't be suitable if you're planning to buy your new home within the next year as you won't be able to access your funds until the 12 month period is up. If you do make a withdrawal, you'll only receive a rate of 3.03% for that month.

Fixed rate savings

If you're not in any immediate hurry to get your foot on the ladder, it could be worth locking up your money for a year or so in a fixed rate bond.

One of the best fixed rate bonds on the market is the ICICI Bank UK Fixed HiSave Fixed Rate Account which offers a very attractive rate of 3.90% AER for one year. And because the rate is fixed, you won't need to worry that it will suddenly change.

The downside is that you won't have access to your funds for that year - but as I said, if time isn't an issue, you can build up some tasty interest during that time. You'll also need at least £1,000 to open the account.

Don't forget that although ICICI is an Indian bank, your money is fully covered by the UK Financial Services Compensation Scheme, as long as you invest £50,000 or less.

Alternatively, the AA Fixed Rate Savings Account is offering a rate of 3.76% for 11 months - and you'll only need £500 to open it.

Instant access

If you're an eager beaver and hope to buy a property in the next few months, tying up your funds for a year or more isn't practical. So you're probably better off investing in an instant access savings account which will allow you to withdraw money at your leisure.

Both the Alliance & Leicester Online Saver Issue 4 Account and the ING Direct Savings Account are attractive options offering a rate of 3% AER, including a bonus. The bonus on the Alliance & Leicester account is 2% until 5 April 2010, while the ING account is offering a one year bonus of 1.97%.

Personally I prefer the ING account because its bonus rate is fixed, not variable. So even though the overall interest rate is variable, you can be reassured the rate won't fall below 1.97% during the first year.

Save on tax!

By investing in a cash ISA you're effectively giving the taxman the big heave - ho because you won't have to pay any tax on your savings.

One of my favourite ISAs on the market at the moment is the Barclays Golden ISA which pays a very tasty 3.61%. This might not sound like a spectacular rate, but because it's tax free, it's the equivalent of 4.51% for a basic taxpayer, and 6% for a higher rate taxpayer. Sounds good now, right?

Note though that this rate includes an introductory 1% bonus, so the rate will drop by 1% after the first year.

So don't forget to make the most of your savings and ensure you keep them in a high interest home! That way you'll be able to invest in a home for yourself even quicker. Good luck!

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