How to save lots of up a deposit to purchase your first house

For those without the bank of mum and dad behind them, getting on the property ladder is a tall order these days.  

The increase in house prices relative to incomes over the last 20 years has led to the average deposit size rising by around 160 per cent since 2005, according to the Building Societies Association.

It says the typical successful first-time buyer now needs a deposit of around £60,00. 

However the average first-time buyer deposit ranges from £27,000 in the North East of England to £144,000 in London.

> The first-time buyer’s step-by-step guide to getting on the property ladder 

When it comes to your deposit, lenders will usually ask for at least 5 per cent of the property’s value, and in many cases 10 or 15 per cent.

Having a bigger deposit as a proportion of the purchase price will mean you own more of your home outright, and could also open you up to cheaper mortgage rates. 

The task of saving is made harder by the fact that house prices continue to rise.

While average prices have flatlined in recent months thanks to higher mortgage rates, Savills is forecasting that they will rise by 21.6 per cent by the end of 2028.

On top of that, many first-time buyers, particularly those buying in Southern England and London, also have to factor in stamp duty land tax (SDLT), alongside the normal purchasing costs such as legal and surveying fees. 

Although there is a SDLT exemption for anyone buying a property worth under £425,000, anything above that level starts to get hit. If you were buying a £500,000 property for example, you would be required to pay £3,750 in SDLT.

> Stamp duty calculator: What tax would you pay to buy a home 

If you are building up a house deposit, choosing the right savings account to stash your money could help you to reach your goal quicker. 

We look at the best accounts for first-time buyers, including Lifetime Isas, easy-access deals and fixed bonds. 

You can also see the best interest-paying accounts on This is Money’s best buy savings rate tables, which are updated daily. 

What is the best account to save for a house deposit? 

Lifetime Isa

Anyone saving towards a deposit to buy their first home should consider putting money into a Lifetime Isa (Lisa).

Savers under the age of 40 can open a Lisa and until they hit 50, the Government will chip in £1 for every £4 they save, giving a £1,000 bonus on the maximum £4,000 a year they can pay in. The savings are also tax-free. 

But there is a catch. Lisas are intended to help first-time buyers and those saving for retirement, and the rules state the money cannot be used for only two reasons: 

• To buy a first home costing less than £450,000 
• To withdraw after the age of 60

If the Lisa is cashed in before the age of 60 for any purpose other than buying a first home, or if a first home is bought that costs more than £450,000, it can leave savers worse off.

This is because a 25 per cent penalty applies to the amount withdrawn – not only taking back the Government bonus, but also some of the money the saver paid in. 

Two people buying together can each use their Lisa as a deposit, but the £450,000 limit remains the same. 

The saving and investing app, Moneybox, is currently offering the best cash lifetime Isa deal paying 4.4 per cent. 

This deal is available through the Moneybox app. The rate includes a 0.75 per cent fixed bonus for the first year. 

> Read our guide to Lifetime Isas and whether to stick with cash or invest

Regular savings accounts

A regular savings account allows you to set aside a set amount of cash each month and can be a great way to kick-start a savings habit.

They often offer good interest rates, but the monthly limit may be quite low and there can be restrictions on who can apply and when money can be taken out.  

The best regular saver deals are offered by the big banks to their existing current account customers.  

The Co-operative Bank and First Direct both have a 7 per cent interest regular saver, for example. 

The Co-op allows existing customers to stash away up to £250 each month or £3,000 per year, while First Direct allows up to £300 each month or £3,600 over the year.

Over the course of 12 months, a First Direct regular saver could earn up to £136.50 in interest. 

Two other notable regular saver accounts are offered by Nationwide, paying 6.5 per cent and Lloyds bank, paying 6.25 per cent. 

Easy-access

If you have a large amount of cash sitting in your current account, switching it to one of the best paying easy-access savings accounts is definitely something to consider.

Many easy-access savings accounts allow savers to add and withdraw funds as and when they need, making it a great place to store money when you’re about to pull the trigger and start looking for somewhere to buy.

However, some providers place limits on the number of withdrawals that can be made each year – sometimes allowing cash to be taken just two or three times. 

It’s vital that savers check the withdrawal limits before committing.  

The best easy-access savings accounts now pay 5 per cent interest. On £10,000 of savings, that’ll equate to £500 of interest over the course of the year.

The issue with easy-access savings accounts is they offer a variable rate of interest meaning banks and building societies can cut or raise the rate at a moment’s notice. However, it is possible to switch accounts to a better-paying one if that happens. 

With the Bank of England expected to cut interest rates later this year, it is likely that savings providers will respond by cutting their variable savings rates. 

> Find the best easy-access savings rates

Fixed rate savings 

Fixed-rates could make sense for anyone who isn’t looking to buy in the immediate future, and wants to lock away a lump sum and watch the money grow. 

Fixed rate savings deals offer guaranteed returns because the interest rate is fixed for a given period of time, typically between one and five years.

However, it means savers will be unable to withdraw their cash for the fixed term, which some might find restrictive. They usually won’t be able to pay in more, either. 

The best one-year fixed rate savings deal pays 5.22 per cent, which would earn £522 of interest on a £10,000 deposit over the course of one year.

For someone looking to fix for two years, the best deal pays 5.05 per cent, while the best three year fix pays 4.8 per cent. 

> Find the best fixed rate savings deals

Use an Isa 

You will potentially need to pay tax on the interest you earn, if you use a regular easy-access account or fixed rate savings deal. 

If you’re a basic rate taxpayer you get the first £1,000 of interest tax-free, and then be taxed at 20 per cent on the remainder. If you’re a higher-rate taxpayer, you’ll get the first £500 tax free and then be taxed at 40 per cent on the remainder.

That means your return after tax could be quite a lot less than the headline rate. 

One way to avoid the tax problem is to use a cash Isa account. You can save up to £20,000 in an Isa each tax year, and any interest you earn is shielded from tax. 

Many of the best rates are close to what you would get with a standard taxable savings account.

The best easy-access cash Isa is currently being offered by two savings and investing app providers, Plum and Chip.

Plum is paying 5.17 per cent, but restricts savers to just three withdrawals a year. Chip pays 5.1 per cent without restrictions. 

If you’re happy locking your money away for a time, there are also fixed-rate Isas. 

It’s currently possible to get a rate of up to 4.77 per cent when fixing for one year, up to 4.63 per cent when fixing for three years, and up to 4.41 per cent when fixing for three years. 

> Check out the best cash Isa rates