How to invest towards your first home

Since being home for the holidays, I’ve discovered the most popular question my family has is when are you going to buy a house? Easier said than done. I’m sure many millennials are in the same boat as me, with rent already taking up a sizable chunk of take-home pay. Finding anything left over at the end of the month to save for a house deposit is no mean feat, especially when the average UK house price was £264,000 in August 2021 – £25,000 higher than in 2020*.

But if I ever want to join the exclusive club of home-owners, I have to start somewhere right?

“I will forever believe that buying a home is a great investment. Why? Because you can’t live in a stock certificate.” – Oprah Winfrey

Should I open a Lifetime ISA or a Stocks & Shares ISA?

While the idea of raising a deposit can seem overwhelming, it’s not impossible. There’s two main ways to invest for your first home, a Lifetime ISA or a stocks & shares ISA.

The Lifetime ISA (LISA) is available for anyone aged between 18-39 and you can save up to £4,000 a year. This money is matched with a 25% government bonus up to a maximum £1,000 per year, until the age of 50.

The LISA does come with a few stipulations. It can only be used as either a deposit on a first home purchase up to £450,000, or for your retirement. So, if you withdraw any money before the age of 60 (other than to purchase your first home) you will pay a government withdrawal charge of 25% – essentially giving back any bonus earned.

But even if you saved this money in cash, £4,000 a year for five years plus the government bonus would be £25,000 – enough for a house deposit.

A stocks and shares ISA doesn’t come with a government bonus, but it does have greater flexibility, depending on your circumstances. You may therefore consider investing towards your deposit and other future goals in an ‘original’ ISA. With this type of ISA, you can invest up to £20,000 a year, with the knowledge that you can easily withdraw any money that you may need in the interim.

Since you won’t receive a government bonus, you would need to generate investment returns of 4% a year on an annual investment of £4,000 to reach the same deposit amount in 5 years’ time**. And with interest rates so low on cash that means you need to be taking on a lot more risk.

But it’s definitely possible, as some Elite Rated funds and trusts have demonstrated over the past five years. Here are the top ten performers and what they could have returned had you invested £300 a month for that time period (£18,000 in total):

The ten Elite Rated funds helping you buy your first home

Fund NameAmount after investing £300 a month for 5 years***
Scottish Mortgage Investment Trust£49,886
Baillie Gifford American£46,373
GAM Star Disruptive Growth£37,374
AXA Framlington Global Technology£37,211
AXA Framlington American Growth£33,918
T. Rowe Price Global Focused Growth Equity£32,297
JPMorgan China Growth & Income plc£32,080
Premier Miton European Opportunities£31,669
MI Chelverton UK Equity Growth£31,012
Baillie Gifford Global Discovery£28,260

Clearly, there are choices to be made when saving for a house deposit and a lot will depend on your attitude to risk and the amount of time you have to invest – no one wants to be caught out by a market sell-off like we saw in 2020, just when you are about to sign on the dotted line! But perhaps getting the keys to your own home isn’t such a pipedream after all.

*Source: Office for National Statistics, UK House Price Index, August 2021
**Source: The Calculator Site, £4,000 annual savings with 4% interest calculated yearly over five years.
***Source: FE fundinfo, total returns in sterling, 30 Nov 2016 to 30 Nov 2021

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.