UK homebuyers may find it more difficult to get a mortgage, as lenders deal with a wide range of new regulations aimed at preventing lending to people more likely to default on their mortgages. The new regulations require homebuyers to take strict tests aimed at assessing their ability to cover all aspects of household spending….
We all want our cash to grow and a good savings account can help you achieve that – as well as keeping your money safe for a rainy day.
Savings accounts are simple in many people’s minds but there are many different types, so it is important to understand the differences to ensure your cash works as hard as possible.
Here are the main accounts on offer:
Easy access savings accounts
The simplest form of vehicle is the bog-standard account where you deposit cash and withdraw it when necessary. Here, most providers will pay a variable interest rate.
Easy access accounts are often marketed as instant access deals but you don’t always have an immediate withdrawal facility given you often first need to transfer the money to a current account, which can take up to three working days.
Yet if the account comes with a cashcard, you may be able to withdraw when you want.
These work in the same way except you have to give advance warning before making a withdrawal.
Fixed rate accounts
You can often get a better deal if you are prepared to fix the rate and lock your money away for the term of the account (of between one and five years).
The advantage (if you don’t mind losing access to your cash) is you can be certain of what you will earn and your rate cannot fall. However, if interest rates rise across the wider economy you won’t benefit.
While rare, a few providers allow you to withdraw some or all of your money during the fixed term, though that concession often comes with a penalty, such as the loss of interest.
Regular savings accounts
These usually pay a fixed rate for the term of the account (often one year) as long as you deposit a set amount each month, usually between £25 and £250 (some providers allow £500).
However, if you miss a payment or make a withdrawal, you could face significant loss of interest.
Usually available as an easy access or fixed rate deal, these work in the same way as most other accounts but the interest, unlike in a normal account, is tax-free. This means it is usually best filling your Isa allowance before saving anywhere else.
You can also place investments within an Isa (where most of the returns are tax free). The total Isa allowance in the 2010/11 tax year between cash and investments was £10,200.
You can fill the total with an investment but the maximum allowed as cash is £5,100. This allowance will rise every year from then on in line with inflation.
Interest rate warning!
Regardless of the type of account you have, always keep a close eye on the interest rate for two reasons:
- Many accounts come with introductory bonuses that usually last a year after which the rate plummets. If you’re offered a 4% account that comes with a 3% bonus for a year, it will dive to 1% after 12 months.
- Many banks and building societies cut the rates paid, often with little notification, so keep a close eye and switch account, if necessary. Many providers make it difficult to view your rate as it is not always printed on statements. Most have an online list of rates, though it can sometimes take plenty of searching for.
Also remember that, unless you have a cash Isa, any interest earned will be taxed at your income tax rate.
Whatever you save, ensure your cash is as safe as possible. In the unlikely event your bank or building society went bust the first £50,000 (rising to £85,000 in 2011) you have per person, per financial institution is guaranteed by the official Financial Services Compensation Scheme as long as you’re saving with a UK-regulated provider. If you have more, it’s safer to spread it about.