The best ways to invest to buy your first home

Why invest for a deposit on a home?

The average deposit put down by a first-time house buyer is now £33,000, although in South West England that figure jumps to £45,000. While it’s clear that rising interest rates have made it much harder for many to afford a mortgage, the case remains that the more deposit you can put down, the better rate you should get.

Still, it’s clearly going to take more than giving up streaming subscriptions, or taking a flask of coffee and a packed lunch to work to reach your deposit goal.

One way to potentially grow your deposit is to consider investing in stocks and shares, instead of relying on the interest from savings with cash rates still lagging behind rising inflation. However, bear in mind that investing should be for the long-term, and it will likely take several years to reach your goals. This also comes with the risk of losing money.

The Help to Buy ISA

In the past, first-time buyers could open a special Help to Buy ISA, designed to help them save for a deposit in either cash or stocks and shares.

The Help to Buy ISA closed for new applicants in November 2019. However, the account is still active for those who already have one, and it makes it quicker to save for a first home. With the Help to Buy ISA, the government tops up your deposit by 25% (up to a total of £3,000) when you buy a property.

If you buy with a partner who also has one of these ISAs, both of you can get the bonus.

However, there are restrictions. Those who have a Help to Buy ISA can only continue to pay into them until November 2029, paying in up to £200 every month. You can only claim the bonus up until November 2030, using it to buy a home worth up to £250,000 in the UK (or up to £450,000 in London).

Opening a Lifetime ISA to invest for your first home

The Help to Buy ISA was replaced by the Lifetime ISA (LISA) in 2019. The LISA is an initiative launched by the government to encourage people aged between 18 and 39 to put money aside for their first home or retirement.

The LISA also gives you a 25% government bonus on your contributions. You can put in £4,000 every year, so the maximum bonus you can receive each year is £1,000.

This can be used to buy your first home, as with a Help to Buy ISA, or to spend in retirement after the age of 60.

Like the Help to Buy ISA, a Lifetime ISA can be held in cash or stocks and shares. The value of a stocks and shares ISA can go down as well as up.

Benefits of a Lifetime ISA (LISA)

• A 25% government bonus, worth up to £1,000 a year.
• Tax relief on your savings interest or investment growth.
• Bonus added monthly, instead of when you buy a home, allowing you to benefit from compound returns.
• The option to use the money for retirement if you don’t buy a home.
• £4,000 allowance every year can be paid in, as part of your annual £20,000 ISA allowance.
• Use the account even if you are buying with a partner who is not a first-time buyer.

Limitations of a Lifetime ISA:

• You must be 18 or over but under 40 to open a Lifetime ISA.
• You can put in up to £4,000 each year, until you’re 50. You must make your first payment into your ISA before you’re 40.
• When you turn 50, you will not be able to pay into your Lifetime ISA or earn the 25% bonus.
• If not withdrawing to buy your first home, or for retirement (over 60), you will have to pay back a 25% charge – though this does not apply if the person dies or is terminally ill.
• There is a risk of getting back less than you invested.

What to consider when taking out a Lifetime ISA

The Lifetime ISA has many advantages, but it does have limits. Those aged 40 or above are not able to open one, and after the age of 50 you cannot add to it – although the account remains open, allowing investments to grow.

It can be used only if you are a first-time buyer and, as with the Help to Buy ISA, there are limits to the value of the home you can purchase with the money you have saved. Anything you put into your Lifetime ISA counts towards your £20,000 a year ISA allowance.

You can only buy a home worth £450,000 or under with the money you have saved. This is particularly a problem in London, where the average house price was £544,000 in September 2022, according to the Office for National Statistics (ONS).

Even outside of London in the South East of the UK, the average house price is just over £400,000 – meaning a first-time buyer in an expensive part of the region will find it harder to find a home under the £450,000 mark and will require a larger deposit.

Even if the housing market were to slow down, it would take a large crash in values for London first-time buyers to have a large selection of suitably priced properties to choose from.

Another limitation is that you can only buy a property with a LISA a year or more after you have set it up, though if you are investing in a stocks and shares LISA it is advisable that you invest for a much longer period.

Other ways to invest for your first property

Those not eligible for a LISA, may want to consider a stocks and shares ISA, where you can invest without paying tax on growth or returns.

If you have already used your £20,000 ISA allowance, a general investment account can be used to invest. However, note that you may be liable for capital gains tax if your investment gains go over the annual allowance in the year you buy your home. And if you receive more than £2,000 in dividends from your general investment account in a year, you would be liable for dividend tax.

How to help your children get on to the property ladder

Whether or not you are an aspiring homeowner, those with children might wonder how they too can be helped to build a deposit. Affordability continues to be an escalating problem, especially for younger people, and this may continue to get worse in the years ahead.

Starting early with a Junior Stocks and Shares ISA (JISA) can give your children a head start, and you can put up to £9,000 in each year. , which could see your child through to having a head-start on their deposit into adulthood.

This structure gives your child’s investments the chance to grow with no tax on growth or returns, and the structure will automatically convert to an adult ISA once your child reaches 18.

Risk warning    

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.

A stocks and shares Lifetime ISA may not be right for everyone and tax rules may change in the future. You must be 18–39 years old to open one. If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. So you may get back less than you put in.

Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension.

If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions.

If you are unsure if a Lifetime ISA is the right choice for you, please seek financial advice.