Abbey launches first-time buyer savings deal
In a return to practices of the past when people saved before they bought a home, Abbey has launched a new regular savings account for first-time buyers that pays 8% AER.
The mortgage market has undergone many significant changes over the past year, not least the end of 100% plus mortgages and a return to lenders offering better interest rates to people with large deposits.
Abbey’s new First Home Saver account continues this trend, by rewarding first-time buyers for saving for a deposit. It is available to non-homeowners aged between 16 to 35 who are able to save between £100 and £300 a month. The minimum deposit is between £100 and £5,000, and the maximum amount you can save is £50,000.
Alison Brittain, executive director of retail at Abbey, says: "The best value deals are available to borrowers who have a deposit. By helping first-time buyers save towards a first home, we are re-establishing the link between savings and a mortgage - and in so doing helping first time buyers to get more competitive, more affordable mortgages."
So, what’s the catch? Firstly, this product is limited; Abbey is only making 5,000 accounts available through its 701 branches. That's just seven accounts per branch.
Secondly, savers are not able to make any partial withdrawals and any customer who misses a payment or pays in less than £100 one month will see their interest rate drop to 0.1% for that month only.
Thirdly, once the account has been closed, savers must take a mortgage interview with Abbey. However, the bank says there is no obligation for people to take out an Abbey mortgage and there is no penalty if they choose to borrow elsewhere.
Finally, although the account has an attractive AER, it would take 12 years and six months (151 months of payments) to save its maximum balance of £50,000.
Andrew Hagger, spokesman for moneynet.co uk, says the account would better help borrowers save for a deposit if it
allowed them to put away more than the maximum of £300 per month. But he still welcomes the launch and says other banks should follow suit and start giving borrowers a real reason to save before they buy.
“We need to return to the days where homebuyers are required to put down a deposit on their property," Hagger adds. "This proves to the homebuyer as well as the prospective mortgage lender that people have the ability to save a sizeable sum of money every month and would therefore be in a position to manage a monthly mortgage commitment of a similar size.”
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.