The quickest way for first-time buyers to save £25,000 with just £100 a month – and the slowest accounts
ASPIRING first-time buyers need to overcome sky-high house prices and tough mortgage requirements to get on the ladder.
But the real kicker for would-be homeowners is the daunting task of saving up tens of thousands of pounds for a deposit.
Putting aside such a hefty sum is especially difficult if you’re battling with ever-increasing rent and the rising cost of living.
Higher interest rates also mean lenders have cut the amounts they are willing to lend through mortgages, while monthly repayments are larger than they would have been just a few years ago.
The obstacles have caused many young first-time buyers to gamble with their retirement prospects by taking on ultra-long mortgages, a recent Freedom of Information request to the Bank of England revealed.
Over 40% of new mortgages in the fourth quarter of 2023 – or 91,394 – had terms going beyond 66, the current state pension age.
However, there are several different savings accounts available for first-time buyers that can provide a much-needed boost towards their house deposit, and choosing the right one could fast-track their dream of owning a home.
The Sun asked wealth management company Quilter to crunch the numbers to find out which savings account would help you save up for a deposit in the shortest amount of time.
Quilter analysed how long it would take for a first-time buyer to save up for a £25,000 deposit if they saved £100 a month into the following accounts:
- An easy-access savings account
- Stocks and Shares Lifetime Isa
- Cash Lifetime Isa
- Stocks and Shares Isa
- Fixed-term Cash Isa
- Instant access Cash Isa
Below we explain exactly what each account is how long it would take for you to save using it.
The interest rates quoted are based on typical average returns for that type of account, but it’s important to note actual returns can vary.
Instant access savings account – 17 years and six months
Easy access savings accounts usually do exactly what they say on the tin – they tend to be very easy to take your money out of, allowing unlimited cash withdrawals.
However, this perk means they tend to come with lower interest returns.
As a result, this doesn’t make them a great choice for long term savings goals such as saving for a house deposit.
In fact, Quilter found it would take you a whopping 17 years and six months to save a £25,000 deposit, based on an account paying 2% interest.
How to save for your first home
HAVE you ever wondered how first-time buyers manage to go from savers to homeowners?
Getting a foot on the property ladder might seem like a daunting task, but The Sun’s My First Home feature allows you to find out exactly what it takes to finally get the keys to your own place.
Leanne Gem managed to buy her £456,000 four-bed house with an “underrated scheme”.
Karis Jacobs and her husband George used the 50/50 method to buy their first home just two years after losing their jobs.
Parents Chae and Cem used a “DIY Help to Buy scheme” to buy their £466,000 first home.
Anupam and his wife Shrabanti lost £6,000 free cash when buying their first home – here’s how you can avoid it.
Instant access Cash Isa – 16 years and three months
An ISA (individual savings account) is a type of savings account where you can save up to £20,000 each year tax-free.
An instant access cash Isa lets you take out your money when you want, without a penalty.
This makes them a good option if you think you might need to dip into your savings.
But an added bonus is that they pay slightly higher interest than a standard easy access savings account.
So, even if you don’t need the tax benefits of an Isa but need quick access to your cash, you may want to plump for one anyway in order to bag the higher rates.
That being said, it would still take you quite a long time to save £25,000 if you were paying £100 a month into it.
Based on an account paying 3% interest, you’d be saving for 16 years and three months to reach your target.
Fixed term Cash Isa – 15 years and nine months
Fixed-rate ISAs tend to offer higher interest rates than easy-access ISAs.
This is because you’re agreeing to lock your money away for a fixed amount of time.
Because of the higher rates on offer, you’d get to your target savings goal six months faster than you would using its easy access counterpart.
This is based on an account paying 3.5% interest.
It’s important to bear in mind that with a fixed-rate Isa you usually have to pay a fee for withdrawing money before the end of the term.
Cash Lifetime Isa – 13 years and three months
A Lifetime ISA (LISA) can be opened by anyone aged between 18 and 39.
You can use it to save up to £4,000 a year towards either a first home costing up to £450,000 or for retirement.
Plus, you get a 25% bonus from the Government each tax year, meaning if you saved £4,000 you’ll get a £1,000 bonus.
For this reason, they are a popular way for first-time buyers to save for their deposit.
But it may come as a surprise for many that the are accounts out there that will help you reach your target deposit amount quicker.
Using a Cash Lifetime Isa, you can expect to save £25,000 in 13 years and three months, assuming you’ll get a 3.5% return.
You can open a LISA with any bank, building society or investment manager that offers the product.
Savers can also hold more than one ISA, although you can currently only pay into one each tax year.
LISAs are also transferrable, so you can move your ISA if you want to get a better rate.
Interest is paid tax-free on both the amount you contribute and on top of the Government’s bonus.
Plus, it doesn’t count towards your personal savings allowance.
However, it is important to note that savers will need to have the LISA open for a year before being eligible for the 25% bonus.
Stocks and Shares ISA – 12 years and nine months
Stocks and Shares ISAs hold investments rather than cash.
They can be opened by anyone aged 18 or over and the maximum amount you can put into one is £20,000 per tax year.
These accounts allow you to invest in funds, bonds or shares in individual companies without having to pay dividend, capital gains or income tax on income from the investment returns.
Any money invested into a Stocks and Shares ISA is subject to stock market changes, so there is a chance your money could decrease after you invested it.
Remember, you only actually lose the money once you sell the investments, though.
However, if you invest in a company that hands out dividends and performs well, you could benefit from 12 months of dividend payments if you invest at the beginning of the tax year in April.
So while the risk is higher, the reward is potentially greater too.
The performance of your Stocks and Shares ISA will depend on how you invest, but assuming you get a return of 7.5%, it would take you 12 years and nine months to save for a £25,000 deposit.
Stocks and Shares Lifetime Isa – 11 years
A Stocks and Shares Lifetime Isa is the quickest route to becoming a homeowner by saving into an account, according to Quilter.
They work in exactly the same way as Lifetime Isas, but you will be investing your money in funds instead of holding it as cash.
Putting your deposit fund into one of these accounts could see you save up £25,000 in 11 years.
This is a whopping six years and six months quicker than using an easy access savings account to build up your deposit.
What are the pros and cons of using an Isa to save for a deposit?
FINANCIAL planner Holly Tomlinson, from Quilter, has shared all the benefits and potential pitfalls of using different types of Isas to save for a deposit.
Making use of a Stocks and Shares Lifetime ISA (LISA) can be the quickest route to a £25,000 deposit due to the generous government bonus, potentially taking 11 years if putting away £100 a month.
This is faster compared to almost 13 years for a standard Stocks and Shares ISA, almost 16 years in a fixed-term cash savings account, and a little over 16 years in an instant access savings account.
However, it’s important to note that while the LISA offers a swift accumulation due to the bonus, it does come with caveats.
If you need to access the money unexpectedly before the term, you will face punitive penalties with the LISA.
This is a significant consideration for anyone who might require flexibility with their savings.
Additionally, for investments linked to the stock market, such as a Stocks and Shares ISA, it’s prudent to limit your risk exposure as you approach the time when you’ll need the money for the housing deposit.
Market volatility can impact the value of your investment, and as your goal nears, preserving capital becomes more important than seeking high returns.
Given these points, it is a good idea to seek professional financial advice to optimise the process of saving for a deposit.
A financial adviser can help tailor a savings strategy that balances growth potential with risk management, ensuring that you are in the best position to reach your home-buying goal.
How you can find the best savings rates
If you are trying to find the best savings rate, there are websites you can use that let you compare rates at different providers side by side.
Doing some research on websites such as MoneyFacts and price comparison sites including Compare the Market and Go Compare will quickly show you what’s out there.
These websites let you tailor your searches to an account type that suits you.
There are three types of savings accounts: fixed, easy access, and regular saver.
A fixed-rate savings account offers some of the highest interest rates but comes at the cost of being unable to withdraw your cash within the agreed term.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.
Plus, you can join our Sun Money Chats and Tips Facebook group to share your tips and stories