Be a savvy saver

Only those who have the capital for a deposit can secure a mortgage with decent interest rate repayments. Although returns on savings are not at their best right now, Cathy Neal from Which? Money advises the best route to take...

Better mortgage deals have always been available to home buyers with bigger deposits but the gap has widened since the credit crunch. This means it's more important than ever to save up as much money for a deposit as possible before venturing on to the property ladder.
For example, if you were buying a £130,000 flat and took out a two-year fixed-rate repayment mortgage of £100,000, the cheapest available (for borrowers in England and Wales) would be from Hanley Economic Building Society at a fixed rate of 3.95%. Your repayments would be £525 a month.

But if you only had a deposit of £15,000 so had to borrow £115,000, you would only have a choice of seven deals. The cheapest would be from Clydesdale Bank at 5.99% - more than 2% higher than the Hanley Economic deal. Based on a loan of £100,000 for comparison, this would cost you £644 a month and around £3,130 more over the two-year period including arrangement fees. And if you had to borrow £120,000 to buy your £130,000 flat you would be out of luck, as there are currently no deals available.

So, what's the best way to save this hefty deposit? First, make sure you use up your £3,600 tax-free cash Isa allowance each year. You could do this by putting the whole amount - if you have it - into an Isa at the beginning of the tax year, which always starts on 6 April, or saving £300 a month into one. As you don't have to pay tax on the interest you earn, it's well worth taking advantage. If you had £3,600 in the Which? Money Best Buy Marks & Spencer Money Advantage Isa, which gives you instant access to your money and currently pays 3.1% from £100, for a year you would earn interest of £112 (assuming a constant rate of interest). For all the latest cash Isa and savings Best Buys, visit www.which.co.uk/money.

You could get a higher interest rate of 3.26% from the Best Buy Citibank Flexible Saver ordinary savings account but you would only earn £94 on the same amount after paying basic-rate tax of 20%.