First-time buyers struggle with deposit

3 September 2010

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

"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.

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