There are many ways to generate money for a deposit, including asking the Bank of Mum and Dad for a loan or winning the lottery, but for most of us, saving our own money diligently will be the most reliable option.
However, with the number of options available for first time buyers, it can be easy to get confused.
The most important factors to consider are:
Save or invest?
Investing can be tempting, but the reality is that the value of investments will always have the potential to fall. However, when you save by depositing cash into an account, it cannot fall. Additionally, with interest, the value will increase over time.
Cash savings have the advantage of never losing capital value. Additonally interest rates mean that your savings can grow, without the risks associated with investing. Cash savings are best positioned for short-term use, such as capital to be put toward a deposit for your home.
Investments, such as stocks and shares are better for long-term savings, as better returns are seen over time. The longer you invest for, the less impact market fluctuations will have on your money.
When your savings have a specific purpose, especially one as important as buying a house, investments, which can fall in value are simply not worth the risk. A stock market crash just before buying your dream home is not a complication you need.
So, now that thatās sorted, where should you keep your money?
Account types
The days of storing cash in your mattress are long gone, so itās time to look at the types of account which offer benefits to suit a first time buyer.
The first port of call for first time buyers should always be a Cash Lifetime ISA, if you are eligible. A Lifetime ISA can be opened by anyone who is:
- Aged between 18 and 40
- A UK resident
A Lifetime ISA allows you to save up to Ā£4,000 each year and a 25% government bonus is awarded on all contributions until the age of 40. However, you can continue making deposits into the account until you turn 50.
This money, along with the government bonus, can then be put toward the deposit for a home, if that home is the first you have purchased, and you intend to live in it.
For first time buyers saving toward a deposit, a Lifetime ISA is a no-brainer.
If you arenāt eligible for a Cash Lifetime ISA, the next most beneficial option is a Cash ISA.
Cash ISAs can be opened by UK residents aged 16 and over. Although, if you are planning on getting a really early start on savings for a deposit, Junior ISAs are available for under-16s.
With a Cash ISA you can:
- Make deposits up to the full annual ISA allowance (currently Ā£20,000 per year)
- Earn tax-free interest each year
- Withdraw money if needed in an emergency
- Transfer savings to an account with a better interest rate through your provider and maintain a tax-free status
You can compare different saving accounts and interest rates using the Moneyfacts savings comparison tool.
If you are looking for help and advice on savings and investments, get in touch. Of course, the next step will be finding a mortgage, and we can help you with that, too!