Can I invest my way to a house deposit?

I’ve saved up a bit of money during the pandemic and I want to be able to buy my first house in the next few years.

I’m worried that with rates so low on savings accounts I’m going to earn practically no interest, so should I consider investing to build the deposit quicker?

Up, up and away: Property prices are at an all-time high – and rose £24,500 in the year to January 2022 on average, says Halifax,  so investing to build a deposit could be tempting

Angharad Carrick, of This Is Money, replied: Saving for a deposit for your first house can be a daunting prospect as it can take a long time.

I’m unsure how much you’ve managed to save up over the pandemic but soaring property prices mean putting a deposit together can be a huge hurdle.

The average property price hit a record high of £277,000 in January 2022, according to Halifax’s House Price Index. House prices increased by over £24,500 over the year to that date. 

It means the average 10 per cent deposit for a first-time buyer is a staggering £27,000. Saving that kind of money is a tough task.

You could drop to a 5 per cent mortgage but this will limit your options and will increase your mortgage repayments every month.

You can compare mortgage rates and monthly costs with our calculator.

On top of the deposit you will need to think about other costs, including legal fees, stamp duty, removal costs and furnishing your home.

There are options to help with building a deposit like the Lifetime Isa, which is explained below, but depending on your time frame you may want to consider investing to speed up the process somewhat.

There is a fly in the ointment though and that is that generally experts advise only investing with a time horizon of at least five years. This is because investing longer term has historically decreased the chances of losing money from market downturns.

Money invested is at risk of falling as well as rising in value, so if you need the full amount at a set point in the future then investment risk sits at odds with that.

David Hollingworth, associate director at broker L&C said: ‘Raising a deposit is a key challenge for first time buyers and has only got tougher as house prices have increased. 

‘It therefore makes sense for anyone hoping to take the first step on the ladder to be thinking ahead as they try to put away enough to fund a deposit. Starting earlier should help that process as even smaller monthly amounts will start to build over time.

‘There is some valuable help to be had from the Lifetime ISA where an aspiring first time buyers can save up to £4000 per annum. The Government will top the savings up by 25 per cent giving a real boost to the savings of as much as £1000 each year.  

‘Much will depend on your personal attitude to risk as although investing your savings could potentially give a greater return it could also put the savings at risk and you may not get back what you put in. 

‘Those looking to start well ahead of the expected time of buying may have more time to play with and therefore feel they can ride out some of the ups and downs that stocks and shares may bring. 

‘Those with less time before they will want to access the money and actually get their foot on the first rung may well feel that the risk is too great.

‘Many first time buyers will of course be hoping to get the buying process started as soon as possible and will have limited scope to run the risk of their pot being eroded, so cash will often be the first port of call. 

‘However those that are playing a longer game and have a higher appetite for risk may feel that the low savings rate on offer make it worth considering equity investments.

Jason Hollands, of Tilney Investment Management said: ‘The answer to this really depends on your time horizon. 

‘While accumulating cash savings offers little in the way of returns – in fact negative returns after inflation is factored in – you are not going to wake up one day and potentially find your account has fallen by a third – with the possible exception of the bank having gone bust. 

‘Even in this rare scenario, savings of up to £85k held with institutions with a UK banking licenced are protected under the Financial Services Compensation Scheme.

‘In contrast, while investing has historically won hands down compared to cash over the longer term, it involves risk to capital because the value of stocks and shares fluctuate. 

‘Therefore investing should only be considered as an option by those prepared to take a medium to longer term view, such as five years or more, so that there is time to recover from any shorter term pullbacks on the way.

‘Short term volatility in financial markets can partially be tamed by both the choice of investments selected – shares being the most risky – but also the way you choose to invest. 

‘Investing a little amount each month through a regular savings scheme is a great way to smooth out the short term ups and downs, averaging out the price you pay for your investments over the course of a year and avoiding the potential bad luck scenario of investing a large lump sum, only to see markets tumble shortly after.

‘For many people, the right approach could be to select a multi-asset fund – sometimes also referred to as “ready-made portfolios. These invest across a variety of asset classes and markets to suit a particular risk profile and are the equivalent to a one-stop-shop. 

‘If you think you might need to draw on your investment in the medium term, then it is wise to take less risk and to choose a more cautious or balanced approach, than if you are prepared to remain invest for a longer horizon such as ten years.

‘Don’t forget whatever approach you choose, the closer you come to the time when you are ready to make your property purchase, is sensible to reduce your exposure to riskier investments, by locking in gains and gradually shifting from shares into less erratic investments such as cash and bonds.’ 

Compare the best DIY investing platforms and stocks & shares Isa

Investing online is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.

When it comes to choosing a DIY investing platform, stocks & shares Isa or a general investing account, the range of options might seem overwhelming. 

Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts. 

When weighing up the right one for you, it’s important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.

To help you compare investment accounts, we’ve crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account for you. 

We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide linked here.

>> This is Money’s full guide to the best investing platforms and Isas 

DIY INVESTING PLATFORMS AND STOCKS & SHARES ISAS 

	Admin charge	Charges notes	Fund dealing	Standard share, trust, ETF dealing	Regular investing	Dividend reinvestment
AJ Bell YouInvest	0.25%	Max £3.50 per month for shares, trusts, ETFs.	£1.50	£9.95	£1.50	1% (Min £1.50, max £9.95)	More details
Bestinvest	0.40% or 0.2%	Account fee cut to 0.2% for ready made investments	Free	£4.95	n/a	n/a	More details
Charles Stanley Direct	0.35%	No platform fee on shares if a trade in that month and annual max of £240	Free	£11.50	n/a	n/a	More details
Fidelity	0.35% on funds	£45 fee up to £7,500. Max £45 per year for shares,  trusts,  ETFs	Free	£10	Free funds £1.50 shares, trusts ETFs	£1.50	More details
Hargreaves Lansdown	0.45%	Capped at £45 for shares, trusts, ETFs	Free	£11.95	£1.50	1% (£1 min, £10 max)	More details
Interactive Investor	£119.88 as £9.99 per month	£7.99 per month back in trading credit	£7.99	£7.99	Free	£0.99	More details
iWeb	£100 one-off		£5	£5	n/a	2%, max £5	More details
Freetrade	Free for standard account £3 month for Isa	Freetrade Plus with more investments is £9.99/month inc. Isa fee	No funds	Free	n/a	n/a	More details
Vanguard	0.15%	Only Vanguard funds	Free	Free only Vanguard ETFs	Free	n/a	More details
(Source: ThisisMoney.co.uk July 2021. Admin charges quoted annually, may be monthly or quarterly)