Earn five per cent while saving for your home deposit

With mortgage lenders commonly requiring deposits of tens of thousands of pounds nowadays, first-time buyers looking to take advantage of lower property prices need all the help they can get to build up their savings. Especially given that interest rates are at record lows — the typical instant access account pays less than one per cent.

However, a range of banks and building societies, including Abbey, Britannia and NatWest, have “home saver” accounts offering higher returns. Aimed specifically at people looking to get on to the property ladder, these accounts typically involve monthly saving — and some give bonuses if holders go on to take out a mortgage with the account provider.

Abbey, for example, offers 5 per cent interest to monthly savers in its First Home Saver account. This can be opened with between £100 and £5,000 and accepts ongoing deposits of £100 to £300. Savers are required to have a mortgage interview with Abbey before closing their account.

Up to £5,000 cashback

NatWest’s First Home Saver offers a cashback of up to £5,000 to account holders who take out one of its mortgages. To earn this top payout, savers need to have £50,000-plus in their account. The cashback drops on lower balances — to £500, for example, on amounts of £5,000 to £10,000. Royal Bank of Scotland, part of the same group, offers a similar deal.

NatWest also only pays one per cent interest on savings, which is among the lowest rate for this type of account.

The banks do not guarantee to give mortgages to their “home savers” and, even if a loan is offered, this may not be the best deal around, warn experts.

Saver-borrowers should consider how the overall package stacks up and could be better off using an account paying more interest and then shopping around for the mortgage.

Tax perks for parents

Parents and relatives can help prospective first-time buyers build up their savings while also gaining some tax benefit. Individuals can give away up to £3,000 a year and avoid all inheritance tax (IHT) on this money.

If the first-time buyer is a basic-rate taxpayer but the donor is a higher-rate taxpayer, there’s also less income tax on the interest.

Other savings deals

There are still reasonable savings deals with no mortgage-related conditions.

Barclays Monthly Savings pays 6 per cent for a year, though deposits are limited to £250 a month (£3,000 in total).

Tax-free individual savings accounts (Isas) pay up to 3.5 per cent but savers can put in only £3,600 each year (rising to £5,100 following the Budget announcement).

Instant access accounts subject to tax pay up to 2.5 per cent, while the best fixed-rate bonds offer more than 4 per cent.