Abbey goes back to the old school of savings

In a move likened to building society practices in the 1970s, Abbey has introduced a savings account to encourage aspiring home owners to save up for a deposit on their first home.

Called the First Home Saver, the account pays a variable annual equivalent rate of 8 per cent and is opened to first time buyers between the ages of 16 and 35. The account can be opened with a minimum balance of between £100 and £5000. Savers are required to maintain a monthly standing order of between £100 and £300.

There are no penalties for withdrawals but savers must be disciplined in setting aside any amount within that range each month or risk having interest for delinquent months slashed to 0.1 per cent. On the other hand, if savers deposit more than £300 in a single month, Abbey has the right to terminate the account. The maximum account balance allowed is £50,000.

Upon account closure savers must take a mortgage interview with Abbey. The bank said savers will not be penalised if they choose a non-Abbey mortgage. However, it was confident that it will have the best mortgage available for first time buyers at the time of withdrawal.

To some advisers this saving-mortgage link is akin to old ways of lending practised by building societies from the 1960s and 1970s. As the competition for long-term mortgages increased with banks joining the fray, building societies loosened up and abandoned that rule.

Keith Jarman, director of Hughes Carne IFA, said: "Forty years ago if you wanted a mortgage you had to be a saver. You would be seen as a reliable customer if you were disciplined and built up your deposit.

"For Abbey, the payback can be two-fold. It attracts more funds under tight liquidity conditions and builds up its potential mortgage customer base whose profile it can gauge at the onset as it monitors their saving habits."

Reza Attar-Zadeh, director of savings and investments marketing for Abbey, said: "Someone showing good discipline in saving does suggest that they could be a good paying customer."

Mr Attar-Zadeh said that because the deal came with no hidden catches response has been good. Abbey had already signed up 100 customers within three days of the product's launch on 3 November. The product is limited to the first 5000 openings.

Mr Jarman however pointed out that those who took up this offer had to be determined savers and that it may take up to five years for savers to accumulate a decent amount for a deposit.

Michael Brill, director of Essex-based Baronworth Investment Services, said: "It is a very, very attractive competitive interest rate but it is also restrictive and a lot of people may not like it for that reason. You should also look at Isas, bearing in mind their tax-free status. It may be worth losing half a per cent for the flexibility."