First-time buyers struggle with deposit
First-time buyers are still facing an uphill struggle to get on the property ladder despite a further slide in house prices.
The problem is not house prices but the amount required for a deposit, with mortgage lenders continuing to insist on an absolute minimum of 10%.
This means first-timers need to raise at least £18,000 (using the average house price of £166,507) of cash by the time homebuying fees have been accounted for.
But, with interest rates having sat at a paltry 0.5% since March 2009, first-timers are facing an uphill battle in trying to save this sum.
So where should they start?
"The first place to save is always into a cash ISA as the interest earned will be tax-free," says Andrew Hagger, spokesperson at Moneynet.co.uk.
"The best ISA is from Principality Building Society which pays 2.8%, while Cheltenham & Gloucester pays 2.7%. Both accounts offer instant access to your money."
But ISAs only allow you to stash £5,100 away in cash each tax year (which runs from April to April) and where to put the rest of your cash can prove trickier.
The very best rates available are on fixed-rate bonds where the longer you renounce access to your money, the higher the rate will be.
The best paying bond is therefore over the maximum five years from Indian bank, ICICI. The rate is fixed at 4.75% during this period and the bank is fully regulated under the Financial Services Compensation Scheme (FSCS), which will protect the first £50,000.
"But most people will want to buy their house within a shorter timeframe than five years, so should look at shorter-term bonds," says Hagger.
"The best paying two-year fixed rate bond for example pays 2.75% from Nottingham Building Society."
If you want to be more flexible than this, you will have to bite the bullet and put your money in an easy access savings account.
None of these pay particularly competitive returns but some offer appealing bonuses for the first 12 months, which may be all the time you need to save.
The AA is the current market-leader paying a rate of 2.8% on its easy access account. This comes with a 2.3% bonus for the first 12 months however, so if you don’t end up buying in this timeframe, be sure to move your cash to a higher-paying account before the rate slumps down to 0.5%.
Because at this point your money may as well be sitting under the mattress.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.