Should I opt for a savings account that pays better than a cash ISA?
Q: I'm always told ISAs should be my first port of call when it comes to saving but I've found a savings account paying a better rate than a cash ISA. Is it still better to opt for the tax-free savings vehicle?
A: There are lesser-known savings accounts offered by some providers, which are designed specifically for those building up a deposit to buy a house. While the interest rates are, like many accounts at the moment, nothing to write home about, some have cashback deals or give you easy access to a mortgage if you fulfil certain criteria or save a certain amount.
In your case, Nationwide offers a Save to Buy account aimed at first-time buyers, and offering a 5% deposit mortgage at up to 95% loan to value after six months. This is a particularly attractive offer as 95% mortgages are currently hard to come by, though being accepted for the savings account does not guarantee a mortgage.
You must pay a minimum of £50 into the account per month and there are regular saving requirements to be eligible for the mortgage. The account pays 2% interest on balances up to £20,000 - the maximum that can be deposited.
There are cashback rewards available on completion of the mortgage.
But such schemes have the whiff of a gimmick about them and when compared to other savings accounts, they don't quite stand up.
Saving for a deposit is one of the biggest savings goals most people ever undertake, so it's worth considering other regular savings accounts that pay more. For example, the United Bank UK 90 Day Notice account pays 2.26%.
If it's going to take you a couple of years to save up and you don't need access to your money, you could also consider the two-year fixed-rate bond from the Islamic Bank of Britain, which pays 2.63%. The minimum deposit is £1,000.
Saving on such an account will not carry the sort of restrictions or ties Nationwide's Save to Buy account and mortgage might, so it's worth shopping around and making sure you're clear on any qualifications attached to a mortgage savings scheme.
Regular savings accounts
The attraction of these accounts is the high interest rate they pay. They require customers to deposit money each month, without fail. They come with a number of restrictions, such as monthly deposit limits, no one-off lump sum deposits and restricted withdrawal facilities. Although they are marketed with impressive-looking rates, it’s important to remember that as your money builds up gradually, your overall return will be lower than if you’d deposited a lump sum.
A savings account on which the account holder is required to give a period of notice before making a withdrawal or face a penalty, usually a loss of a specific number of days’ interest or pay a fee. Notice periods of 30, 60 or 90 days are common. These accounts usually pay higher than average interest rates and require large initial deposits (£1,000 minimum) so the notice period and penalties are there to discourage withdrawals. Some of these accounts will only allow a certain number of withdrawals a year.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
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.