A guide to different accounts when saving for home improvements

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Furnishing or redecorating your home can be an expensive and time-consuming business, so the last thing you want to be worrying about is your savings account. However, if you are storing money away for the future, it makes sense to have it earning as much interest as it can, since you may need to squeeze every penny when investing in home improvements.

There are many different types of savings accounts, which vary both in terms of the interest rates they offer and the terms and conditions they subject you to. With all the different options around, knowing where to place your money in order to make it work for you can be difficult, especially with adverts for almost every bank claiming to offer better terms than its competitors.

There are several things to look out for when choosing a savings deal, as they come with different terms and conditions that are important to understand when choosing where to keep your hard earned money.

Making savings for home improvements, or for decorating a newly built house, can be a long process involving a lot of money, so you can often make decent amounts in interest if you search around for the best savings accounts rates. However, it is important to understand the other factors that you should look at when choosing a scheme.

Minimum deposit

Some savings options require a large initial investment, often many thousands of pounds. Accounts with higher minimum investments often provide better rates of interest.

Alternatively, some savings deals will only pay out interest if you deposit a certain amount each month. These regular deposit accounts are convenient for those saving bit-by-bit, but only if you can commit to consistently depositing a certain amount.

Withdrawal notice

Some savings options, even those that advertise themselves as 'easy access', require a period of notice before you can withdraw any money from them. If you might need to access your cash at short notice, for example if you have found a short-term deal on a home improvement, then savings accounts with instant access are vital. Many deals with withdrawal notices do allow withdrawal on demand, but at the expense of losing any interest you would have earned.

Bonus rate

Some banks offer improved interest rates for the first few months or first year, but once this introductory period is over money leftover may accumulate very little interest. Depositing your cash in an account with an enticing initial rate of interest can be beneficial, but make sure you are able to transfer your money to a different deal once the high interest rate period is over.

ISA

An ISA is an account on which the interest you receive is not taxed, to a certain level. Interest payments on other accounts are taxed at 20 per cent, or 40 per cent for higher-rate taxpayers, so with the best ISAs you can make significant savings. In 2011-12, the tax-free allowance is £5,340.

Fixed rate account

A fixed rate savings deal, which can take the form of a fixed rate ISA or a fixed rate bond, is a great way of guaranteeing interest payments on your savings, as long as you don't mind locking your money away for a while. Most savings schemes have variable rates of interest, which depend on the central bank's interest rate or the provider's changes in competitive stance, meaning you have to monitor your interest levels to see if they have changed.

With a fixed rate ISA or bond, you are guaranteed the savings rate you sign up for, so you do not have to keep track of any fluctuations in interest rates.

Some fixed rate accounts do allow for early withdrawal, but you will usually lose any interest payments as a result. If you do anticipate having to dip into your savings, an instant access saver is a better option.

Internet accounts

Nowadays, the best interest rates can be found online. Internet-only accounts are those that are opened and managed online, and they offer the best rates because the bank saves on operating costs. You often need to link your online account to a branch-based account in order to transfer money into it, so if you do not want this hassle, or you prefer managing your savings through a branch, an Internet option may not be for you.

Understanding these terms is vital to picking the right deal, which will ensure that you don't end up locking your money away if you need access to it, and that you get the best return on your money.

Comparison websites are often the best way to decide where to invest your money, and many come with separate review sections or message boards where other people who may have been in the same situation provide advice on what account is best, and detail their own experiences with different banks.