Top Savings Accounts For First-Time Buyers

Trying to save up for a deposit on your first home? Find out which savings accounts are best for first-time buyers.

So you want to get on the housing ladder. Here's the bad news: in today's battered and credit crunched mortgage market, to stand any chance of bagging a decent rate from a lender, you need to be able to put down at least a 10% deposit.

Now here's the good news: all that economic battering and credit crunching means a) property is getting cheaper and b) banks are going all out to attract retail savings deposits - which means higher rates for savers!

So, if you can manage to build up a decent stash of savings for your deposit, your money will go a lot further. Not only will you earn more interest than you would have done a year ago (despite three cuts in the Base Rate), but you may also be able to get a lot more property for every pound you put down.

The question is: what is the best way to save for a deposit? Which accounts pay the best rate of interest? And what potential pitfalls do you specifically need to watch out for, as a first-time buyer?

The Clock Is Ticking

To figure out which savings account will suit you best, you need to figure out how quickly you plan to get on the ladder.

This is because, typically, the longer you can lock your money away for, the better the rate you can get.

For example, if you're not planning to get on the ladder for at least another year, you might want to consider a one-year fixed rate bond, such as the ICICI Bank UK HiSAVE Term Deposit.

Not only will you can earn an eye-popping 7% interest on your savings, but the rate is fixed - so it's guaranteed to stay that high for the full year.

Alternatively, if you'd prefer a British bank, Bradford & Bingley also pays 7% on its eBond 31 -- but you'll need at least £1,000 to open this account.

Be aware, however, that you will not be allowed withdrawals on the Bradford & Bingley account until the maturity of the bond, while the ICICI account will cut your interest rate to 5% if you withdraw before the end of the one-year term.

So you need to be sure that you won't need to access your cash for any reason before then (for example to pay your mortgage, survey or legal fees).

Instant Access

If you're planning to get on the ladder in less than a year, then an instant access savings account is probably a better option for you. With these accounts, you can withdraw your savings whenever you want to.

The rates on offer on these accounts are also extremely attractive. For example, both Kaupthing Edge and Alliance & Leicester are currently offering an amazing 6.5% AER on instant access savings accounts.

Personally I prefer the Kaupthing Edge account, because it is truly instant access - meaning there are no penalties for making a withdrawal. If, on the other hand, you make a withdrawal from the Alliance & Leicester account, no interest is earned on the account balance that month (except in July, when withdrawals are allowed without loss of interest).

Regular Savers

If you are planning to save regular amounts each month, then you might do well to open a Regular Savings Account.

The market-leader at the moment is Halifax, which is offering a whopping 10% AER to regular savers. And if you can put an extra balance of £5,000 into a separate Halifax savings account, you'll enjoy a further 2% interest, taking the total to an impressive 12%.

Sounds good? Be aware of the small print. You need to be prepared to pay in £25 to £500 every month. And also, most importantly for first-time buyers, you cannot make withdrawals for 12 months, or the interest rate will revert to the Halifax Web Saver rate (currently just 4.36% and 4.45%). So again, sadly, not ideal for anyone planning to get on the ladder in the next year.

You may also want to consider opening a Natwest Home Saver account. This account will give you a certain amount of cash back on completion of a Natwest mortgage if you save with Natwest for six months. But personally, I think this deal is a bit of a rip-off. Read my Foolish friend Jane Baker's article about this product to find out why.

Most Regular Savings Accounts tie you in for a year to get the full benefit of their top interest rate -- but remember, you don't need a Regular Savings Account to benefit from saving regularly and the miracle of compounding. You can set up regular standing orders into most savings accounts, including Cash ISAs, something many people forget.

Tax-Free Savings

Which leads me nicely into tax-free savings. In fact, if you're a tax-payer and you haven't yet used up your full £3,600 tax-free savings allowance, a Cash ISA should be your first port of call, before any other type of savings account.

This is because you are not taxed on the interest you earn on savings in an ISA - unlike any other savings account.

My favourite ISA at the moment is an IceSave account which pays 6.1%. I like this account because it is guaranteed to beat the Base Rate by 0.3% until January 2013. But you can get a higher rate ISA - from Barclays - which pays 6.25%. Be aware, however, that this includes a 1% introductory bonus, so the rate will fall by 1% after the first 12 months. Both are instant access.

Keep Your Eyes On The Prize

My final piece of advice would be: Keep your eyes on the prize. It can be very tempting, keeping a lot of money in a savings account - particularly an instant access account. But don't allow yourself to dip in.

Remember, where there's a will, there's a way. And where there's a way, there's a house...

More: An Easy Way To Buy Your First Home