19

I've just sold my house after relocating and got £45,000. I am now looking for a house to buy. In the area where I live now houses are around £500,000, so I will need at least £50,000 for the deposit, £15,000 for stamp duty tax and about £2,000 in solicitors fee. I'm short of around £20,000.

I'm figuring out how to save money monthly to increase the pot. What I would like help with is where to keep the current pot.

Cash ISAs don't seem to pay out much (I would get £200-300 in a year). Stock ISAs offer bigger gains but are recommended for longer periods.

I'm planning to buy in around a year time. What should I do?

  • Are those money something you can afford to lose - do you want to take risks? I expect not considering your purpose; and in that case keep them as cash or short term government bonds. – ssn Jan 10 at 13:00
  • @ssn what's the shortest time you can keep bonds? – algiogia Jan 10 at 13:08
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    you can ’always’ sell your bonds if there are any willing buyers (usually there are for government bonds for most countries). I believe that the shortest maturity for most government bonds is 3 month (there might be exceptions) and up to 30+ years. – ssn Jan 10 at 13:38
  • Does your bank offer term deposits ? 270/300/330 days might be ideal if you're committed to 1 year. – Criggie Jan 11 at 2:09
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    An out of the box suggestion, is to minimise your spending for the next year as well as maximising your return on savings. Holiday at home, cook more and dine out less, all the little things will add up significantly over a year. – Criggie Jan 11 at 2:10
30

The standard answer is that if you need the money soon (less than three or so years), you should not be putting it in risky investments and just park the money in your savings account or similar "safe" holdings. Since you plan to buy in a year, you probably should leave it in your bank account. Sure, you won't gain much interest, but you also sound like you need every penny and can't afford to wait around for any investment to recover if a downturn happens.

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    Yeah, if this was the US, I would maybe recommend a 1 year CD. – Kevin Jan 10 at 20:49
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    I’d strongly recommend a savings account over a current account. The interest rate is an order of magnitude different in most cases and your money is equally safe and accessible in both cases. – Notts90 supports Monica Jan 12 at 8:52
  • @Kevin - I doubt a 1 year CD would be of much help as the OP is currently saving. The yeah is (optimistically) 2%. X * .02 = 20000 -> Solve for x = 1,000,000 – sevensevens Jan 13 at 2:26
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    @TomTom Might want to consider one backed by Lloyds instead, tbh... – Frosty840 Jan 13 at 13:21
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    @Kevin personally I’d suggest a standard savings account for OP as it’s zero risk, which in the OP’s situation sounds more of a priority over interest. Any other option has risks which would mean they couldn’t afford their house. – Notts90 supports Monica Jan 13 at 16:28
14

There are no safe one-year investments that pay a high rate of return. If they existed, then everybody would be putting all their money into them.

If you want to be confident that the money will still be there in a year's time, just put it into the best bank or building society account you can find. The interest over one year will be negligible anyway.

When you do apply for your mortgage, it can be helpful if you can show that you really do have the money for the deposit, and aren't just using short-term loans to pretend you have it. Having the money sitting in the bank for a year makes this easier.

5

In as short a time as a year, the best way to invest money is to simply save it. "A penny saved is a penny earned".

Simply not eating out all the time will save you thousands of dollars a year, which is more than most investments will earn, unless you have a large amount in an investment and have some really good stock brokers working for you. For instance, if you spend £10 on a meal 5 times a week for 52 weeks, that's £2600. If you spend £5 on a morning coffee for that same amount of time, that's another £1300.

There's plenty of other things that drain your money besides just food and coffee, but I won't get into that. Instead, I'll suggest a book to read: America's Cheapest Family. Yes, I realize that's the "wrong" country, but most of their advice can be used regardless of which 1st world country you live in.

This largish family has lived off meager means for decades and has prospered fairly well. They also help people in real life, and their advice comes from this experience as well as their own experience living these suggestions. I've paid off a fair amount of debt by saving money using their methods, so I'm another happy customer (and I'm not affiliated with them or this book in any way).

Depending on your job and your current spending habits, you might not be able to make up the missing £20k, but if you can afford a £500k house, there's probably a good chance you can. Granted, many of the suggestions in the book expect a longer term savings than just a year, but there's plenty of advice that can be done immediately to start saving money. And saving a little here, a little there, and a little in 15 other places might just get you where you want to be.

This is investing in yourself, your family, and your future in ways that the stock market can't compete.

4

You should be putting it in a cashlike, very low volatility investment, preferably an insured one like a CD or municipal bonds.

It might seem clever to put it in the stock market and get a 10% bump, but you could just as easily take a -20% beating. That is called volatility and it's the thing to avoid.

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    CDs and municipal bonds basically don’t exist in the UK. – Mike Scott Jan 11 at 17:39
  • A -20% beating is nowhere near as likely as a 10% bump. – Acccumulation Jan 11 at 19:09
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    @Acccumulation Ordinarily, I'd agree. But we've had a mad run-up of stock values that smells like 2007. – Harper - Reinstate Monica Jan 11 at 19:29
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    @RonJohn They’re certainly similar, but someone who doesn’t even know what they’re called clearly doesn’t know enough about the details to be recommending them. – Mike Scott Jan 12 at 12:41
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    @Acccumulation remember what Harper wrote in a comment: "Ordinarily, I'd agree. But we've had a mad run-up of stock values that smells like 2007." He doesn't think the 4Q2018 drop was sufficient, and I sympathize with him. There's no way I'd put that money in the stock market. Heck, I've even rebalanced my portfolio more towards the defense. – RonJohn Jan 13 at 3:21
3

You say that you're planning on buying a house. You don't seem to have any specific need to buy a house, so you can afford to take some risk. You should focus on bonds, but you can have some of your money in stocks. Even if there is a dip in the stock market, it's likely to be accompanied by a dip in the real estate market, so you'll need less to buy the house. In fact, you might want to put some of your money in an REIT ETF to increase the correlation.

  • Definitely this. If you're scraping every single penny you have saved into buying this house, you're not ready to buy that house! Put it something that will get reasonable returns, perhaps a mutual fund with a reasonable risk/return history, and buy the house when you're ready! – corsiKa Jan 13 at 4:43
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    Bad advice. You'll lose far more money continuing to rent when you want/plan/intend to own (i.e. there aren't other factors that make renting less unattractive) than you could ever plausibly make gambling. If circumstances are such that it makes sense to buy, aim to buy as soon as you can afford it and can find something at a good price. – R.. GitHub STOP HELPING ICE Jan 13 at 17:09
  • @R..GitHubSTOPHELPINGICE That's a claim that needs a significant amount of evidence.The stock market has significantly outperformed real estate in the long run. – Acccumulation Jan 13 at 19:13
  • @Acccumulation: It has nothing to do with real estate market, but also the (extremely) load-bearing phrase in your comment is "in the long run". Assuming OP's situation and that buying makes sense to begin with, difference between rent and mortgage interest for the duration you rent is pure lighting of money on fire. – R.. GitHub STOP HELPING ICE Jan 13 at 19:22
1

Open an account at a discount brokerage and invest in an ultra-short term bond fund -- either a mutual fund or an ETF. The better ones have been yielding as much as 3.8% for the past year, and any downside going forward should be very brief.

For example, the bobble in equity markets at the end of 2018, from which some equity funds took a year or more to recover, affected most ultra-short term bond funds for only two months or less. If you can take the risk of delaying your purchase for 2-3 months in the event of unforeseen market events, you can be rewarded with investment returns much better than a savings account.

When you reach the point in time that you expect to make a purchase within the next month or two, it would be prudent to cash-in your investment, lock-in your gains and protect the funds from losses by putting it in the bank.

1

Cash ISAs are usually poor investments, their rates are often low and their only benefit is the interest is untaxed. And, for most people, the personal savings allowance 1 makes it moot anyway.

For just a year, an old fashioned savings account would suit. Generally, internet only banks offer better rates than the well known high street names. So, go with one of those from your favourite comparison site. Anything that has FSCS protection would be fine.

You can get a bit more interest for locking in your money a bit. 90 days notice and 1 year fixed offer similar rates, around about 1.6% currently. Slightly higher 'interest' with shariah accounts because of the small risk the bank may default.

0

In order to hedge against a potential increase in property prices, I would suggest investing in an ETF which tracks a property index. For example "The FTSE EPRA/NAREIT UK Index offers exposure to UK listed real estate companies and Real Estate Investment Trusts (REITS)." BlackRock has one, and I'm sure others do too.

Then if the UK market suddenly increases in value by 10%, your investment will increase by roughly the same amount. A term deposit will leave you short. Of course, there is the risk that property values drop, and then a term deposit would have been the better option - but because property is cheaper, you will still have enough for your deposit. This strategy isn't looking to maximise your returns, it's trying to reduce the uncertainty of achieving your objective of buying property in one year.

Because your investment time frame is short, pay extra attention to transaction costs. For example, fees for buying/selling and the buy-sell spread.

-1

From an investor's point-of-view the question is, does the view of the UK housing market indicate any macro investment opportunities ?

For instance if the GBP is expected to decline then a sell position in the GBP/USD would produce about 0.75% rollover interest on the leveraged amount. Then the 45000 number easily takes a 225000 forex position which produces about 1680 in annual interest. And as set relative to a 500000 house purchase then a 225000 currency position is not really very much risk. But if the GBP does decline then there is a gain.

Or if UK interest rates are expected to rise, then the rise in interest rates can be hedged by taking a sell-side 10-year government-bond future. And there's no premium to pay for a futures position but just a margin deposit. If interest rates do rise then the futures position has a gain or if interest rates decline then the planned house purchase has a gain of less financing cost.

Either case is just frosting-on-the-cake because no-one can promise a gain of 20000 on 45000 in a year's time. The 20000 is probably planned from occupational income.

Otherwise just beat inflation with a U.S. six-month corporate-bond ETF at about 2.5%. But that's selling the GBP. So also consider a UK corporate bond fund of a longer duration. The investment is successful if it overall keeps up with inflation.

  • Anyone can promise a £20,000 gain. What they can’t do is deliver on the promise. – Mike Scott Jan 11 at 19:15
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    If by "sell position in the GBP/USD" you mean "buy USD", why not just say that? This is not investing, it's gambling, and profit from it isn't "interest". And "leverage" means gambling with borrowed money. – Acccumulation Jan 11 at 19:20
  • Forex positions, that pay daily rollover interest, work with currency pairs. But the macro view ? The central bank has mentioned lowering overnight bank rates which could lead to a lower GBP. The future home buyer wouldn't mind if mortgage rates also decreased but the decline in the GBP might be more precisely expected. – S Spring Jan 11 at 20:01

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