I cant get my head around the best way to save - please help!

GazBGood

Hi there,
I'm not too up on how interest works on saving accounts and how much that interest is taxed etc...
For a very basic bit of background my girlfriend and I have saved £10,000 between us to go towards a house (we are currently renting) and we want to make the most of this off the bank.
We are with Alliance & Leicester/Santander and have seen two products recommended through money saving expert. One is the Santander First Home Saver account which offers 5% interest and the other is a Santander 3.2% ISA.

My confusion is around the best way to deposit this money.

Now you can make an initial deposit of £5000 in the Home Saver account then after that make a deposit of between £100 to 300 a month to be eligible for the 5% interest (any more or less than that drops the interest rate to 0.1% for that single month) - but I will be taxed on the interest i think.
The ISA as stated is 3.2% a month with no tax on the interest.

I have two ideas of how to deposit the month:

1) We could put £5000 in the ISA and get 3.2% tax free interest from then on and also put £5000 in the home saver account in the first month (paying £300 a month there after) and get 5% interest from then on.

or

2) We could put £5000 in the home saver in the first month and get 5% for that month, put £5000 in the second month and only get 0.1% interest for that month, then put £300 a month in from the third month on. That would mean after month three the account would be at £10,300 earning 5% interest on-wards.

Which one would make the most overall interest taking tax considerations into account?

I really hope someone can help me get my head around this, I'm starting to confuse myself trying to figure it out!

Best regards,

Gareth

King_Weasel

The tax bit is easy: if you're both taxpayers then you can't reclaim the tax, which is 20%. So the 5% gross rate becomes 4% and the 0.1% becomes 0.08%.

So the HomeSaver pays 0.8% more than the ISA except if you breach the rule, when it pays 3.12% less. Now, 3.12 / 0.8 = 3.9. So as a rule of thumb you recover the loss by overpaying into the HomeSaver inside 4 months. (There could be some compounding involved here, but I don't know what the bank does and I don't think it matters much.) It therefore seems to me that if you're saving for more than 4 months you should put the lot into HomeSaver and stand the month's low interest.

Can you not each have an account and so stay within the limit throughout?

Hope this helps - I've tried to keep it simple.

Simon11

Only issue is if Santander spot what you have done, by chucking in £5,000 the month after. They could in theroy close your account for doing that, but its never been confirmed. I personally have stuck by the rules and put the rest of my monthly savings in an Isa

GazBGood

Brilliant, thanks for the help guys!

jsinc

Putting more into the First Home Saver on the second month? That's an interesting idea. I'm in a similar position to you but had never even considered that as a possibility. Have had a look at their website and there is no stipulation that I couldn't deposit 43k the second month after 5k lump sum the first month.

I'll try to find some precise small print, as may well be the case that the computer systems wouldn't say no.

jsinc

Ok I went to see Santander. There were no advisers available and the assistant I spoke to wasn't very familiar with the account. So we discussed some of the major issues (such as no rules saying such a strategy wouldn't be possible, and a 50k max balance which would take over 12 years to accrue with a lump sum of 5k and 300 a month...a bit odd for what is a home deposit saving account). She went to see her manager and came back to tell me that yes I could indeed start with a 5k lump sum, put 40k in the next month (and only receive 0.1% that month) then revert to the 5% from following month on total principal and interest with ongoing 300 per month standing order.

I needed to think about it, so she left me with some paperwork. In the small print that it seems they're probably not aware of it does state 'If you deposit more than £300 in a single month we reserve the right to close your account'?!

I'm detailing all this because I won't be going for it (due to tax reasons rather than the rate) so don;t mind others possibly jumping the gun as such a strategy works out equivalent 4.1% if you were to just take that 48k and put it in a monthly accruing account from day one (assuming no tax for sake of comparison).

However, I have a feeling the branch staff have it wrong on this, so if anybody decides to go for it (gareth?) I'd suggest you get a confirmation in writing before signing up, as they could otherwise possibly later renege on the deal and any more months of a zero rate would really impact your savings. Looking at the small print the rate it's also variable (again not outlined when I spoke to them), so need to get clarification of how variable - when could change etc.