Unusual ways to save for a deposit
First-time buyers are trying unusual measures to build their deposit, writes Adam Williams
Faced with sky-high property prices and woeful savings rates, those looking to buy their first home are being forced to try new ways to save up for a deposit. The amount first-time buyers need to raise for a housing deposit has risen sharply, according to Halifax, the bank. New buyers now need to put down £33,127 – 71pc more than a decade ago. In London, the average deposit is now £114,952, three times the amount required in 2008.
Yet many savings accounts currently offer paltry interest rates of around 1pc – despite two increases in the Bank of England’s base interest rate in the last year – leaving people unable to grow their cash.
Ammar Zahid, 30, is one future homeowner who is using investment to grow his deposit. The software engineer from Guildford, Surrey, started investing three years ago, retaining his existing cash savings of £4,000.
“I turned to investing because interest rates were quite low, and I decided to invest my spare money instead,” he said.
“I was quite far away from getting a deposit for a house. Because house prices have been going up, it was quite hard to raise a deposit.”
Mr Zahid said he needs between £15,000 and £20,000 to put a deposit down for a two-bedroom property, which typically costs £250,000 in his local area. He started with a £400 initial investment through AJ Bell, a fund shop, and has added £50 each month since.
If he had left those contributions in a cash savings account paying 1pc, it would be worth £2,240 today. However, following strong growth, his investment portfolio is worth £5,500.
Data from Hargreaves Lansdown, an investment fund shop, found that a person saving in cash would have grown their deposit by 8.5pc over the last decade. By comparison, a saver investing in a typical FTSE index tracker would have seen returns of 100.2pc, after fees are deducted.
Many others are following in Mr Zahid’s footsteps and choosing to invest to build up a housing deposit. The Lifetime Isa was launched in 2017 and offers a 25pc government bonus to first-time buyers who are saving in cash or investing. The Help to Buy Isa offers the same percentage bonus, restricted to cash savers only. In the 2017-18 tax year, savers opened 166,000 Lifetime Isa accounts, and it is understood that 40pc of these were investment accounts.
Sarah Coles, of Hargreaves Lansdown, said she had noticed a shift from cash saving to investment.
“Despite the base rate rise in August, we are still in an era of low interest rates, so anyone saving for a home needs to think carefully about how to get their money working harder for them,” she said.
This increased interest in investment is part of a wider shift away from cash. Data published by HM Revenue & Customs showed that the number of cash Isas fell by 697,000 in the 2017-18 tax year, while the number of stocks and shares Isas grew by 246,000.
Ray Boulger of John Charcol, a mortgage adviser, warned those chasing high returns to consider the risks of investing.
“Although using stock market investments to build up a deposit to buy a home can appear attractive in view of the low rates paid on most savings accounts, the big attraction of cash savings is that you always know what your savings are worth and in nearly every case they are guaranteed by the Government, up to £85,000 per provider,” he said.
Mr Boulger said only those who did not plan to buy in the next five years should consider investing. Cash savers should instead use governmentbacked Isas to help grow a deposit more quickly.
For first-time buyers choosing the investment route, Mr Boulger suggested selling any holdings well before exchanging on a home. This minimises the risk of a stock market crash wiping out any deposit immediately before the purchase date.
James Norton, of investment firm Vanguard, said those using investment should consider it a long-term way to grow money, rather than a quick fix.
“If you are aged 18 now and looking to buy at 30, 12 years is sufficient time to consider investing,” he said. “But investing is only suitable for these medium to long-term goals. Portfolios will rise and fall in value. This is normal and investors need to be prepared for it.”
Mr Norton said prospective first-time buyers should invest in a mix of companies, funds and bonds. The more risky elements of the portfolio should be sold around three years before the planned house purchase date, he said. A contingency fund should be kept, with enough cash to pay for three to six months of rent, bills and other expenditure.
Though Mr Zahid’s investment pot has grown much faster than it would have in cash, it has not all been plain sailing for him. He chooses to invest in individual stocks and aims to make a 10pc return on each company before investing the proceeds elsewhere. He admitted that he made some mistakes due to his initial lack of knowledge.
“Some companies have made a profit and some have made a loss, but overall I’ve made a significant profit compared to what I would have earned from a bank,” he said.
Mr Zahid said he hoped to buy a property in about four years’ time, but was aware that this could change depending on how the markets performed.
“I’m going into this with my eyes wide open and keeping track of how my investments are performing every day,” he said.
“When I get closer to the date I want to buy I will pull out of the market a bit. I know there is the risk of a stock market crash, but at the moment banks are not giving me enough interest on my savings. My only target is to make more money than I would have got at the bank.”
‘My only target is to make more money than I would have got at the bank’