01 November 2016

What’s the best way to save for a house?

If you’re keen to get your feet on the property ladder, it’s a good idea to develop a saving habit early. But with so many options available, you’d be forgiven for getting confused about which savings option is right for you.

Before you begin house hunting and your search to find the right mortgage, you’ll need to start putting a deposit together. As well as the potential of saving with a group of friends, or with help from your family, there is also a selection of savings products that could help, including our Help to Buy: ISA and range of instant access accounts

You’ll therefore need to think carefully about the right options for you. It’s important to consider when you plan to buy a home, how much you’re able to save per month and how long you're wanting to save for.

Here, we look at how first time buyers can save towards a home, focusing on the pros and cons of the Help to Buy: ISA and instant access accounts.

Explore the Help to Buy: ISA

These accounts are specifically designed for people who want to enter the housing market for the first time.

Launched at the end of 2015, Help to Buy: ISA is a cash ISA product that you could use to help save towards your deposit. The Government will add 25% extra to your savings balance, up to a maximum of £3,000 (if the eligibility criteria are met), when you use the money saved towards the purchase of a new home. After the initial deposit (of up to £1,200) the account lets you add up to £200 a month.

What are the pros and cons of these accounts?

Pros

  • They’re tailored to meet the needs of first time buyers, with the government bonus likely to come in particularly handy

  • Any interest earned is tax-free because it's a cash ISA

  • If you are buying together with another first time buyer, you could get two bonus payments from the Government if you each save in a Help to Buy: ISA.

Cons

These products come with certain restrictions which are worth bearing in mind - 

  • You’ll only receive the government bonus if you have a savings balance of at least £1,600 and you buy a home to live in with the purchase price up to £250,000 (or £450,000 in certain London boroughs)
  • You need to bear in mind that you can’t open a cash ISA and a separate Help To Buy: ISA with different ISA providers in the same tax year.

Learn more about Help to Buy: ISA.

Use your personal savings allowance

When saving for your first home you're going to need a savings account that allows you to pay into it regularly. Getting a good interest rate is important, and one way you can help yourself is by saving into a cash ISA.

What is a cash ISA?

A cash ISA works like a normal savings account and there are different options available including fixed rate accounts or instant access. They have long been hailed for their tax benefits, since those who use them don’t pay tax on the interest they earn. However, you are limited to the amount you can pay into an ISA within a tax year. For the 2016/17 tax year, the total ISA allowance is £15,240.

What if I go over my cash ISA allowance?

If you are able to save more than the ISA allowance, then you can still save tax-free due to the launch of the personal savings allowance in April 2016. Basic-rate taxpayers can now earn up to £1,000 in interest tax-free on top of an ISA, with the figure for higher-rate taxpayers standing at £500. These changes mean that the majority of people will no longer pay tax on their interest in non ISA accounts.

How does this benefit me?

Thanks to these changes, individuals can enjoy tax benefits on a broader range of savings accounts – rather than just ISAs. For example, you can now make use of products like instant access accounts, safe in the knowledge your interest won’t be taxed on the first £1,000 if you are a basic-rate taxpayer. This could be beneficial if you plan to save more than the £200 monthly limit on a Help to Buy: ISA – and if you want easy access to your cash. You can however still save more than the £200 limit for a Help to Buy: ISA in another cash ISA if it's with the same ISA provider.

However, many savings accounts come with terms and conditions, such as limiting the amount of withdrawals you can make, or capping the amount than can be deposited every month. Make sure you check all the rules carefully to see if they meet your needs.

Saving tips

As well as reviewing your options, it’s important to consider how you can develop a saving habit to hit all your targets.

Budgeting offers one way to identify potential savings. By drawing up a list of all your sources of monthly income and your outgoings, you’ll be able to identify areas where you can cut back and save the cash instead.

And rather than simply spending any spare money you have left over at the end of each month, why not save it instead? In the long run, building a sizeable deposit could prove more satisfying than buying glitzy shoes or gadgets which you might only use once.

Find out more about Nationwide’s saving options

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