What is the best way to save for a deposit on a mortgage?

If you are a first time buyer, particularly if you have just moved out of the final stages of your education, then the prospect of securing a mortgage on your property may seem a distant dream. The consistently high price of housing has meant that not only is it difficult enough to find your ideal property, but securing a mortgage for it, including that all-important deposit, can be hugely problematic.

To combat this, large numbers of young people have decided that the best way to get onto the property ladder is to find an affordable place to rent while they begin work, before trying to save up as much money as they can in order to fund a deposit for a new home.

Nowadays, there are many different savings accounts available from a whole host of providers that are keen to attract savers. The question is - what is the best way to save up for your deposit from the start? Is it simply a question of placing your money into your chosen account and then adding to it until you have enough for a realistic deposit on a home you love, or is there a better way to ensure that you secure the best savings rates at all stages?

It is important to distinguish here between the different stages of life that are encountered. When people finally leave home, find a place of their own and begin work, there are often a lot of unexpected bills and payments that need to be made. As they get older, this tends to happen less and strange as it may seem, even little changes in day-to-day life can affect how your savings are working for you.

In days gone by, the answer was much simpler. You simply looked for the best savings accounts available, and put your money in it weekly or monthly, until you had built up sufficient funds for what you needed. Nowadays, however, it is not quite so straightforward, but there is far more flexibility in the process and more scope for your money to earn interest at a better rate.

If we imagine a young person or couple looking to start saving for a deposit on a home, then they are likely to be in a position where they may require a certain degree of flexibility over their savings. They may find an unexpected bill come in, or have a change in lifestyle, such as learning to drive or having a child, which can mean that they may require access immediately to any cash they have stowed away. As such, it makes sense for younger people in this position to have access to an account that offers them easy access to their savings.

In this situation, an easy access savings deal, or a cash isa, is arguably the best choice, depending upon how much they intend to save each year.

Easy access accounts tend not to offer a high rate of interest compared to many others forms of saving, particularly over the longer term but they do mean that people can have instant access to their cash. It is worth checking if there are any penalties incurred by withdrawing from the account more than once a year, as some banks only allow one free withdrawal within a 12-month period.

An ISA works in very much the same way and allows the user access to their funds. However, these are slightly different in that there is a limit as to how much can be put into one in any one year. In 2011-12, that amount is £5,340 for a cash ISA. The advantage, though, is that any interest your money makes is completely tax-free.

Alternatively, if an individual is in a position where they have a steady fixed income and outgoings and is in the position of being able to save a set sum each month towards their deposit (secure in the knowledge that they are not going to need to access the funds in the near future), there are considerably more options available to them.

One option is a fixed rate cash ISA. This is similar to a cash deal, but tends to offer a slightly higher fixed rate of interest in return for the user having restricted access to their cash over a set term. Again, you can invest up to £5,340 a year into this ISA, and this can be a good way to allow your investment to grow.

If you are looking to save more than £5,340 a year towards your deposit, then a stocks and shares ISA may be the best option. This option invests your money in stocks and shares and any returns those investments make are added to your lump sum free of charge. Obviously, the risk is that your money may not earn as much as an interest-only ISA, but many people are happy to take this risk, especially when interest rates are so low. You can save up to £10,680 a year into a stocks and shares deal, or you can split your cash and put up to £5,340 in a cash or fixed rate ISA and a further £5,340 into a stocks and shares option.

Finally, if you have a lump sum to invest that is more than the limits for ISAs shown above, then a savings bond may be a good choice. You can invest as little as £1 or up to several million pounds into a bond, and each pays a set amount of interest over your money over the time it is invested. You can opt for a fixed rate of interest, or a tracker bond, which tracks at a set amount above the base rate. This is a workable alternative if a couple has received a lump sum of cash in a will which is significant, but not quite enough to cover the deposit of their preferred home.

Saving enough for your deposit need not be a worry; if you plan your finances carefully and follow the advice on these pages for your own circumstances, you will find that you can get that money saved quickly and move into your new home quicker than you would have anticipated.