Iona Bain

How to invest your way to a house deposit

How to invest your way to a house deposit
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Back in the day, saving for your first home used to be a bit of a doddle. Find a nice savings account paying 5 or 6 per cent, stick away as much as you can every month, and, within a few years, head for the estate agents. 

Talk of a ten-year slog to get on the housing ladder and using the stock market to build up your deposit was unheard of. But that was then.

Kirstie Allsopp provoked controversy earlier this week by saying she felt 'enraged' when young people claimed they couldn't afford their first home because 'there are loads of people who can do but don't.' But is it merely a case of cutting back on life's luxuries?

 In such a tough financial climate, it would be tempting to see investing as a magic wand that can conjure up the keys for that longed-for first home.

After all, a standard savings account today pays less than half a per cent a year and, with inflation inching upwards, saving is a recipe for losing money, not accumulating it. Meanwhile house prices are on steroids. 

So can investing help you achieve your property-buying dream? Maybe. Firstly, you need to use the right tax-efficient vehicle. The Lifetime Individual Savings Account (LISA) is like the ordinary ISA, as you can put it into either cash or stocks and shares.

But unlike the ISA, you can’t cash it in until you are buying a house or reaching retirement. That’s because the LISA offers a government bonus of 25 per cent on whatever you save, up to £1000 a year (should you save the maximum £4000) if you are aged between 18 and 40. If you exceed the limit, you could have a stocks and shares Isa as a top-up, giving you another £16,000 to invest, tax-free.

If you’ll likely hit your deposit target within five years, stick to the cash LISA, as you won’t have enough time to weather the stock market’s short-term volatility. If your timescale is longer, the stocks and shares LISA is a real possibility. But can you cope with putting your deposit at the mercy of the markets? Yes, you can learn to tolerate more risk, and take steps to manage it. The longer your timeframe, the more risk you can afford to take.

Still, investing newbies often underestimate how they’ll really feel when their portfolio swings downwards. You need to be certain you’ll have the discipline and nerve not to sell out. There’s also the chance your investments may be underperforming at the precise moment you’re looking to buy.

Cashing in your LISA early comes with a penalty of 25 per cent, which means losing all your bonus plus 5 per cent of your own money – a grim last resort. So, only use the LISA if you have savings elsewhere and can really commit to it.

Taking all the above on board, let’s consider your options. The time-poor can outsource the process to a digital wealth manager. Nutmeg and Moneybox both offer the LISA, using a questionnaire to assess your situation and serving up a ready-made portfolio to match.

Both provide socially responsible portfolios and Nutmeg offers fully regulated financial advice costing £350. They’re attractive and accessible, but charges aren’t always clear, and their performance hasn’t always been competitive.

If you prefer handling your own investments, you could open a LISA via one of two main investment platforms: Hargreaves Lansdown and AJ Bell. While both offer solid information and choice, you must watch out for costs. These can be stupefyingly difficult to compare - the financial consultancy lang cat has a guide on Isa pricing that’s worth consulting.

Over time, paying excessive charges will seriously dent your returns. Consider index funds and ETFs (exchange-traded funds), which track markets or sectors cheaply. Vanguard’s Lifestrategy range is often seen as an effective ‘one-stop-shop’.

There are also mutual funds and investment trusts, where managers cherry-pick investments on your behalf, but only a minority have comfortably beaten the market over the long-term, including Fundsmith Equity and Scottish Mortgage (run by Terry Smith and James Anderson respectively). You could mix and match, using index funds for exposure to mainstream swathes of the market and active funds for more niche areas such as smaller UK companies, where they may have an edge.

You could dabble in individual shares, but you’ll need to devote time to finding undervalued companies and have the conviction to stick with them, rather than trading in and out of trendy shares, if you want your returns to be sustainable.

Finally, regular automatic investing restricts you to one active trade a month, but this is cheaper than instant buying and selling, which can lead to death-by-a-thousand-trades. Yes, make sure your portfolio stays balanced, swapping out some investments when market conditions fundamentally change. But once you have picked a well-diversified portfolio that suits your timeframe and risk appetite, leave your investments alone - and let the stock market work its long-term magic.

Written byIona Bain

Iona Bain is author of Own It: How our generation can invest our way to a better future.

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Topics in this articlePropertyhousing market