How to save up for a house deposit

Rising house prices means first-time buyers need to stump up more cash than ever for a deposit
With property prices surging in recent years – by 19.3 per cent in London in the 12 months to June, according to ONS data – the amount needed for a house deposit has shot up. The latest figures from LSL Property Services show that the average first-time buyer put down just over £30,000 for a house in the South East of England in July.
And while investing in stocks and shares through the new Isa (Nisa), or more conservative cash Nisa products over shorter time horizons, will still be the first choice for many, increasing numbers of savers are using peer-to-peer lending as a short to medium-term investment option. The Peer-to-Peer Finance Association found that over £500m of new money was lent in the first half of 2014 through online platforms like Zopa, with more than 66,000 retail investors offering loans to individuals and small business. And with returns of over 5 per cent on offer at the major platforms, peer-to-peer’s popularity looks set to increase.
The pace of property price rises has slowed over the summer, and external assistance is available through government schemes like Help to Buy. But the average UK-wide deposit for a first-time buyer was still £26,642 in July, £30,133 for properties in the South East, and a whopping £62,253 in the capital, according to LSL.
Add in extra costs like stamp duty (1 per cent of a property’s value between £125,001 and £250,000, and 3 per cent between £250,001 and £500,000) and mortgage arrangement fees (up to £2,000 for some lenders), and the amount of cash needed to buy in the South East could easily reach £35,000. Even using a government scheme like Help to Buy, which allows you to buy with just a 5 per cent deposit, you’d need over £15,000 up front for a £300,000 property.
To save for this, Danny Cox of Hargreaves Lansdown says that the first place most people will look is the Nisa tax wrapper, with its new £15,000 annual allowance. “For shorter time horizons, usually less than five years, you’re looking at cash Isa products,” he says. But with rates on cash Nisa products so low, it’s difficult to get much of a return above inflation at the moment.
Money Saving Expert highlights Coventry Building Society’s 2.75 per cent four-year fixed-rate Isa as a best buy at the moment, but with the latest consumer price index inflation figure at 1.6 per cent, that’s not much of a real return. Through a peer-to-peer platform with rates of over 5 per cent, however, you could have a £31,000 deposit together in five years by starting with an initial £11,000 investment and then adding £250 per month.
But Cox says that it is important not to see peer-to-peer lending as a straightforward alternative to cash products – you don’t get equity-like returns without taking on equity-like risks.
To stop the value of house prices racing away from your investments, one option is to invest in funds, like Castle Trust’s Growth Housa, which aim to track property prices. However, Cox thinks that many of them don’t exactly do what they say on the tin once the cost of the derivatives involved is factored in. “I’d be tempted to go for an All-Share tracker instead,” he says.
The FTSE All-share index has gained 5.46 per cent over the past 12 months, similar to the 5.2 per cent offered by Zopa. But while a stock market crash may set you back a few years, peer-to-peer offers less volatile, fixed returns over certain periods. And if you are going to use peer-to-peer, says Cox, it’s best to go with a well-known platform, rather than chase the highest rate.