Updated: Nov 11, 2020
Savings Accounts are tools that should be used to make your money work towards your goals. A lot of people think they can only have one savings account, or only one ISA. This is not the case. The only restriction is a £20,000 cap on savings within ISAs but this is across ALL ISAs, not just one. Each type of account can be used in different ways to work towards the same goal, getting you on the property ladder.
Costs Associated with Buying Your First Home:
Obviously when saving for our first home, our main priority is going to be ensuring we have enough to cover the deposit. People normally save for a 5% - 20% deposit, depending on house prices in your area, and whether you chose to buy via Help to Buy, or other Low Cost Ownership schemes such as Shared Ownership. But there are a tonne of other elements that go into buying your first home.
Firstly, you need to work out if you're going to pay Stamp Duty, a tax that is on homes costing £125,001 or more. First-time-buyers will pay no Stamp Duty on the first £300,000 for properties worth up to £500,000. Once you have decided on a house and you want to make an offer, there will be a Valuation Fee of which the cost can be £150-£1,500 based on the property’s value. Next, you'll need to get a survey on the property to ensure there are no issues with the house before buying. Surveys range from a basic home condition survey costing around £250 to a full structural survey from £600 or more. All of this is legal paperwork, and overall you'll pay around £850-£1,500 including VAT in legal fees. And finally you'll need to pay a small £40-£50 fee for the Electronic Transfer of transferring the mortgage money from the lender to the solicitor.
DON'T FORGET - Removal costs for physically moving home, and anything you'll need to pay towards re-decorating, renovating, or the cost of buying new furniture.
Types of Savings Accounts:
Help to Buy ISAs:
If you are saving to buy your first home, save money into a Help to Buy ISA and the Government will boost your savings by 25%. So, for every £200 you save, receive a government bonus of £50. The maximum government bonus you can receive is £3,000. This account is now closed for new applicants, but I know a lot of people were pushed to open them before the Nov 30th 2019 deadline, even if they only put £1 in. Now you're ready to start saving, what does a LISA have to offer?
You can use a Lifetime ISA to buy your first home or save for later life. You must be 18 or over but under 40 to open a Lifetime ISA. You can put in up to £4,000 each year, until you’re 50. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. A Lifetime ISA can be a Cash savings account, or a Stocks & Shares account. When you turn 50, you will not be able to pay into your Lifetime ISA or earn the 25% bonus. Your account will stay open and your savings will still earn interest or investment returns. You need to have the account open for 12 months before buying your first home and a the withdrawal penalty charge (for withdrawal other than a home or retirement) is currently 20%. It goes back up to 25% on 6 April 2021.
Regular Saver Accounts:
Ideal for building up savings, these accounts require you to save a set amount each month, usually for a term of twelve months. With higher interest rates than easy access accounts they are attractive if you like to automate your savings, but there can be penalties if you miss a regular payment. These accounts can be a great way to add towards your home buying savings goals as seen above there are limits to saving in Government Bonus accounts. If you're splitting your savings goal monthly and you're putting £333 into your LISA in order to hit the £4,000 limit by the end of the year, you may have more money available to be saved, which is where a regular saver account can come in handy.
Notice Savings Accounts:
These accounts normally have higher interest rates, but require you to give 30-120 days notice to withdraw your funds. There's no limit on deposits making them perfect for big savings goals when you know the exact time you'll need the cash. If you already have a large portion of your house fund saved, you may wish to put this into a Notice Account that will earn higher interest than Easy Access Accounts and it's ready to be used when the time comes. This means this amount can be earning higher interest while you continue to save monthly in other accounts.
Similar theory to Notice Accounts, very useful if you have money saved already but aren't needing to use it until a certain time.. They allow you to deposit a single lump sum for a set period of time which can range from six months up to five years or more. You’ll be unable to access the money for the duration of the bond but you’ll receive interest every year, and the interest rate is fixed for the full time.
Stocks and Shares ISA:
If your home-owning goal is a little further away, around 5+ years away, you could also invest your savings into the stock market for potentially higher gains during this time. These savings accounts are used to invest, tax free, and while potentially offering a higher return than other savings accounts, it is important to note that your capital is at risk, meaning any money you put in, could go down in value. S&S ISAs are ideal for long-term saving and investing, and can be DIY (meaning you choose your investments yourself) or managed (the platform you use to open the account chooses for you based on your chosen risk strategy.)