Prospective first time buyers (FTBs) face a difficult decision on where to hold their savings until it comes time to buy.
With house prices expected to fall throughout 2009 and mortgage deals aimed at FTBs starting to follow suit, many will view next year as an ideal time to step onto the property ladder.
The question is what to do with your savings until you find the house of your dreams?
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High interest versus access
Fixed rate savings accounts obviously offer a better rate of interest than the instant access variety, but they can carry heavy penalties of more than 3 month’s interest for withdrawing your money prematurely.
With most fixed rate accounts locking your money away for at least one year, this is obviously less than ideal for anyone planning to buy a house in the near future. Furthermore, you’ll no doubt be looking to save every penny you can between now and then, yet most fixed accounts don’t allow top ups.
On the other hand, instant access accounts pay less than the fixed variety and rates are expected to fall even further in the coming months. Some analysts predict the base rate will be cut by more than 1% as the government looks to battle the impending recession, and when the base rate falls, saving rates follow.
So while you may have access to your money, you’re paying a heavy penalty in terms of lost interest.
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A combined approach
The best solution is to try and find some middle ground – that is, a way to earn decent interest on your money without locking it away for a long time. Perhaps the best way to do this is to adopt a dual-pronged approach, making use of both fixed and easy access savings accounts.
As we mentioned at the start, most fixed rate deals lock your money away for at least a year, but there are a handful of shorter term offerings that will hold your money for just a few months.
The best of these can be found at Birmingham Midshires, which is offering a 5.83% AER with a six month term. You should put the vast majority of your savings in this account (it’s never a good idea to lock away all your savings, as life can throw up surprises – such as losing your job – that may require you to access money in a hurry).
That way you’re still guaranteed a good rate, while the shorter term means you’re far less likely to incur a penalty for early withdrawal. Even if you do find a house before the bond matures, it’s worth remembering that the time between putting in an offer and actually paying the money can be up to a couple of months.
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Find an easy access account
Because this bond doesn’t allow top ups, you will also need to find an account for any money you plan to save between now and the time you buy a house.
A regular savings account may seem like a great idea as they pay up to 8% interest. Unfortunately, these also require that you put money in every month for a year and make no withdrawals during that time or the rate will fall drastically.
That means an easy access account is probably your best bet. Alliance & Leicester currently pays an impressive 6.3% on its e-saver account, so it’s certainly worth a look. Keep in mind that it doesn’t pay interest in any month you make a withdrawal – unless the withdrawal is in July – so the rate you earn will be slightly lower in reality.
Alternately, Brittania Building Society pays 6% on its DirectSaver Reserve account and doesn’t penalise you for withdrawals.
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As a final point, both these accounts currently pay a higher rate of interest than the fixed rate bond, so you may be wondering why you shouldn’t simply put all your money in one of these. The answer is that both these accounts – and pretty much all variable rate accounts – will fall sharply in the coming months, whereas the fixed rate bond is guaranteed.
