Where is the best place to keep my money if I’m buying a house soon?

Mouthy Money Your Questions Answered panelist Laura Suter answers a reader’s question about where to keep money for a house deposit and the value of Premium Bonds. 

Question: I’ve got £50,000 in Premium Bonds which my Granny gave to me. I’m planning on using the money to buy my first home in the next few years. Should I move them somewhere else or is it safest to leave them where they are?

Answer: A big thanks to your granny, that’s an amazing gift to be given and will go such a long way towards a first home. 

Let’s tackle Premium Bonds first. They are a fun option to gift someone, as you have the chance of making them a millionaire, but they aren’t the best for getting a decent return on your money.

Based on the average amount of luck you would get a 2.2% return, but lots of people win nothing. If you want to risk it you could keep your money there and hope for a decent pay out, but if you want a guaranteed return on your money you’ll need to look elsewhere.

People like Premium Bonds because they are safe and Government-backed, but as your savings are below the FSCS compensation limit of £85,000 you’ll be covered by a very similar guarantee. You just need to check that any other provider you move it to is covered by the scheme.

Your next option is a cash savings account. If you go down that route you’ll want to hunt out the top-paying account. According to Moneyfacts this is currently 2.85% for an easy-access savings account from Earl Shilton Building Society. That means in the next year your money will earn £1,425 in interest.

An alternative is locking your money up in a fixed-rate account, as you say that you don’t plan to use it in the next few years.

A two-year fixed rate account will pay 4.75% at the moment, boosting your annual return to £2,375. Or a one-year account will pay slightly less at 4.35%.

The downside of locking your money up is that you won’t benefit from any future interest rate rises from the Bank of England. You could split the money between easy-access and fixed-rate accounts to hedge your bets.

The third option is investing it. It depends when you think you’ll buy a property as to whether this is a viable option.

Generally, we say that investing should be for a minimum of five years, so if you want to buy before then it might not be for you. If you do decide to go down this route you could boost your returns, but just make sure you research the options and feel comfortable with the risk you’re taking. 

It’s a boring topic, but we need to talk about tax. Even with the interest you’ll earn on the easy-access account above, you’ll end up paying tax on your savings.

Basic-rate taxpayers can earn £1,000 from their savings tax free and higher-rate payers can earn £500. After that you pay your usual rate of income tax on your savings.

So, if you took the two-year fixed rate account above you’d lose £275 a year to tax if you’re a basic-rate taxpayer or £750 if you’re a higher-rate taxpayer. You will have avoided this issue until now as prizes from Premium Bonds are tax free.

The way to protect your money from tax is to put it into an ISA, either a cash one or an investment ISA, as money in these accounts is free of tax. Everyone has a £20,000 a year ISA allowance, so it will take you three years to move the money into an ISA, but it’s a good idea to start now if you haven’t used up this year’s allowance.

A great option if you plan to use this money for a house deposit is to put the money in a Lifetime ISA. This is a savings account intended for first-time buyers that gives a government bonus to any money you pay in.

You can put in up to £4,000 a year and the government will top it up by 25%. So if you pay in £4,000 you’ll get £1,000 – it’s an unbeatable return. There are cash and investment Lifetime ISAs, so you can pick whichever works for you.

Just be aware that there are some restrictions on the account. The big ones are that you must be 18 to 40 years old to open the account, you can only buy a property worth up to £450,000 and you must have it open for a year before you use it for a deposit.

You also shouldn’t withdraw the money for any other reason, aside from using it as a deposit or as retirement savings, as you’ll face an exit fee for doing so.

I think a good option is to do a mixture of all of these. Some in a Lifetime ISA, some in a standard cash ISA, some in a fixed-rate account and the remainder in an easy-access cash account (unless you go down the investing route).

If you end up with multiple accounts just make a note of when the interest rates on them are due to fall so you can hunt around for the next best deal to ensure your money is still working as hard as possible for you.

Laura Suter is head of personal finance at AJ Bell.

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor.

Mouthy Money Your Question Answered compiled by Rebecca Goodman

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