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I'm currently 22, and I would like to buy a property at some point in 5-10 years, once I can afford the down payment (deposit). I live and work in London England, so for this example, assume my minimum deposit would need to be in the region of £80k-£100k. I save smaller amounts regularly in a Stocks & Shares ISA which is for longer term savings goals, not to accrue funds to purchase a property. This totals about £1,500 per year. Assume I can save an additional £15,000 per year for the purposes of purchasing a property.

I already have ~£50k in low interest savings and current accounts across two high street/consumer companies. These interest earnings are taxed. I am losing real purchasing power due to the current rates of inflation compared to the taxed yield on these accounts.

Where can I put my money to enable me to build the deposit with low risk? Advice for this question targeted towards people in the USA point to Bank CDs (Certificates of Deposits) or zero coupon bonds. Some light research doesn't reveal any similar vehicles easily available to me as an individual investor in the UK - but maybe I'm missing something.

Assume I definitely won't need access to the money for a minimum of 5 years, and that my goal is to maintain or improve real purchasing power over these 5 years.

Update: thank you for the responses so far! Some of them point out the new "Help to Buy ISA", which is suitable for my ongoing deposit savings needs. However, I additionally would be looking for a solution that enables me to transfer my existing savings of ~£50k into a better performing vehicle.

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  • thisismoney.co.uk/money/mortgageshome/article-3002724/… and nationwide.co.uk/products/savings/save-to-buy/…
    – DumbCoder
    Commented Mar 20, 2015 at 11:12
  • You can buy a property in commuting range of London with a much smaller deposit than £80,000. £200,000 is a realistic price for a first-time buyer flat in much of south and east Outer London, and that would need a £40,000 deposit for an 80% mortgage. Plus a few thousand more for stamp duty, solicitor's fees and moving expenses.
    – Mike Scott
    Commented Mar 20, 2015 at 11:21
  • This week's budget also mentioned that from next year, tax on savings would have a tax-free allowance of £1000pa for basic rate taxpayers, or £500pa for higher rates. This could make some accounts - even some current accounts - more attractive than an ISA.
    – Steve Melnikoff
    Commented Mar 20, 2015 at 12:17
  • See also here: telegraph.co.uk/finance/personalfinance/savings/11477204/…
    – Steve Melnikoff
    Commented Mar 20, 2015 at 12:18
  • @MikeScott I agree that property prices are more affordable outside of London. The purpose of my question is to identify a risk averse strategy for needed-in-the-near-future savings that maintain real purchasing power using instruments available to the individual investor in the UK.
    – user26495
    Commented Mar 20, 2015 at 12:22

4 Answers 4

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The chancellor announced an ISA in this week's budget intended for people saving to buy their first home. For every £200 put in the government will add £50 to the account so I would strongly encourage you to put the money into that as it is also tax free.

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  • The Help to Buy ISA looks like a potential solution. I have one reservation, however: It limits the value of the home I can purchase to £450,000 if I am to receive the government bonus. A further concern is that this does not help me with the existing £50k that is losing real purchasing power. I cannot transfer this into a Help to Buy ISA, as the initial deposit is limited to £1,000.
    – user26495
    Commented Mar 20, 2015 at 12:13
  • @MD-Tech - Are there any details on how to apply for a Help To Buy ISA and also, what happens if the government is not re-elected and next government ends this?
    – Phorce
    Commented Mar 20, 2015 at 16:46
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Ultimately you are as stuck as all other investors with low returns which get taxed. However there are a few possible mitigations.

You can put up to 15k p.a. into a "normal" ISA (either cash or stocks & shares, or a combination) if your target is to generate the depost over 5 years you should maximise the amount you put in an ISA. Then when you come to buy, you cash in that part needed to top up your other savings for a deposit - i.e. keep the rest in for long term savings.

The help to buy ISA might be helpful, but yes there is a limit on the purchase price which in London will restrict you.

Several banks are offering good interest on limited sums in current accounts - Santander is probably the best you can get 3% (taxed) on up to 20K - this is a good "safe" return. Just open a 123 Account, arrange to pay out a couple of DDs and pay in £500 a month (you can take the £500 straight out again). I think Lloyds and TSB also offer similar but on much smaller ammounts. Be warned this strategy taken to the limit will involve some complexity checking your various accounts each month.

After that you will end up trading better returns for greater risk by using more volatile stock market investments rather than cash deposits.

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From April 2017 the plan is that there is now also going to be a "Lifetime ISA" (in addition to the Help to Buy ISA). Assuming those plans do not change, they government will give 25% after each year until you are 50, and the maximum you can put in per year will be £4000.

Catches:

  • You will only be able to open it if you are under 40.

You can only take the money out for certain "life events", currently:

  • Buying a house below £450000 anywhere in the country (not just London).

  • Passing 60 years of age.

  • If you take it out before or for another reason, you lose the government bonus plus 5%, ie. it currently looks like you will be left with 95% of the total of the money you paid in.

  • You cannot use the bonus payments from this one together with bonus payments from a Help to Buy ISA to buy a home. However you can transfer an existing Help to Buy ISA into this one come 2017.

  • While you are not asking about pensions, it is worth mentioning for other readers that while 25% interest per year sounds great, if you use it for pension purposes, consider that this is after tax, so if you pay mostly 20% tax on your income the difference is not that big (and if your employer matches your contributions up to a point, then it may not be worth it). If you pay a significant amount of tax at 40% or higher, then it may not make sense for pension purposes. Tax bands and the "rates" on this ISA may change, of course. On the other hand, if you intend to use the money for a house/flat purchase in 2 or more years' time, then it would seem like a good option.

For you specifically:

This "only" covers £4000 per year, ie. not the full amount you talked about, but it is likely a good idea for you to spread things out anyway. That way, if one thing turns out to be not as good as other alternatives it has less impact - it is less likely that all your schemes will turn out to be bad luck.

Within the M25 the £450000 limit may restrict you to a small house or flat in 5-10 years time. Again, prices may stall as they seem barely sustainable now. But it is hard to predict (measures like this may help push them upwards :) ).

On the plus side, you could then still use the money for pension although I have a hard time seeing governments not adjusting this sort of account between now and your 60th birthday. Like pension funds, there is an element of luck/gambling involved and I think a good strategy is to spread things if you can.

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Another option is the new 'innovative finance isa' that allow you to put a wrapper round peer to peer lending platform investments. See Zopa, although I don't think they have come out with an ISA yet.

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