Feature: The savings game
Mortgage lenders are beginning to ask for higher deposits, but what is the best way to start saving for one? Kate O’Raghallaigh looks at the options
For those of you who are thinking about, or have already decided to buy a property in the not too distant future, you probably need no reminders that you are likely to need a considerably larger deposit than that required in recent years. Over the past few months, UK lenders have been increasing their rates and pulling products, with the number of mortgages available falling from 7,931 to 3,096 since the beginning of 2008, according to Moneyfacts.
This week, both Nationwide and Abbey made further alterations to their mortgage ranges, with Nationwide requiring borrowers to put down 10% or more for its fixed-rate and tracker mortgages. Abbey will now only allow borrowers with a 25% deposit to take out an interest-only mortgage, plus you need to show proof that you’ve set up a savings or investment vehicle to build up the funds to repay the capital at the end of your mortgage term. Those without this proof will only be able to borrow 50% of the property’s value.
When 100% deals were widely available, first-time buyers could get on the ladder without any deposit at all. But with such products all but disappearing from the market over the past month, you’ll need to get saving if you want to get on the ladder.
What are the options?
There are a number of options when it comes to savings plans. You could choose to invest an initial amount, either directly in the stock market or via a mutual fund. You could also choose a good old fashioned savings account – now that banks and building societies are struggling with funding, many are offering competitive rates to get as many new savers as possible. Individual Savings Accounts (ISAs) are also a great way to get the most out of your money – you can save a maximum of £7,200 per year, tax-free.
Phil Stevenson, spokesperson for ARK Financial Planning, advocates the traditional approach. He explains: “Pretty much the best course of action open for people in this position would be short-term or ‘hard’ saving into the best paying cash ISA. If you accept the fact that most people will be in their 20’s when in this position and will in all probability look to be in a property before their 30th birthday, this leaves a small restricted timescale. As they will require a degree of security over the final outcome, this leaves cash savings vehicles as the best option.
“An alternative could be to buy premium bonds, although unless you get lucky, you will effectively be forgoing the interest that you would potentially make with other savings methods.”
Market leading cash ISAs are currently offering rates of more than 6%, with Alliance & Leicester’s Direct ISA offering 6.25%. Icesave’s Fixed Rate savings account has a rate of 6.86%, but it’s only guaranteed for six months, so be aware that this could go down once the initial period ends. Royal Bank of Scotland (RBS) has a First Home Saver Account, which can be opened with a minimum of £100 and requires a minimum monthly contribution of £50.
If you’re interested in making more on your investment than a savings account could offer, it’s important to think about how long you plan to wait before buying, according to Darius McDermott, managing director of Chelsea Financial Services. He explains: “The better the return you want, the more risk you have to take. Generally, if you want to make a good return over a longer time period, equities are the way to go. However, if you’re only looking to save for two to three years, it may not actually be worth it as equities only really deliver good returns after around five years.”
So, McDermot’s advice is to find the best rate on a savings account and be prepared to move accounts as and when better deals appear on the market. He says: “Be really keen with interest rates – make your money work as hard as it can.”
Under lock and key
Kevin Mountford, head of savings at price comparison site Moneysupermarket, says that regular savings accounts aren’t a great idea for those dedicated to saving for a deposit. He explains: “People normally put between £25 and £250 per month in a regular saver, which is a pretty slow burn if you’re looking to save up 25% of a property’s value.”
Mountford points out that restricting your access to the money should also be a priority. He continues: “Those saving for a deposit need to have a disciplined attitude. If you have a lump sum to begin with, I would recommend tying it up, as it will mean that you can’t touch it. Some fixed-rate bonds are currently offering rates of about 7%, which certainly provides a good opportunity for those looking to build up a hefty amount. If you start out with £10,000, for example, at 6-7% that is going to increase nicely.”
According to Mountford, it may also be worth opening a savings product with a mortgage lender that you may eventually want to take out a mortgage with. For instance, some building societies give preference to mortgage applicants that are already members through having a savings or current account with them. Of course, it’s difficult to predict which lenders will have competitive products if you are planning to buy in three or four years’ time.
It’s unfortunate that just as house price growth is beginning to slow – providing an opportunity to get on the ladder – many lenders are increasing their requirements for deposits. However, it’s really no bad thing to get into the way of saving regularly, if you haven’t already, before taking out a mortgage. Thanks to increased competition among banks and building societies to attract savings business at the moment, there are some great rates available – it’s just a matter of finding the best option for you.