Savings vs investments - mortgage

emoray

Hey all,

I'm hoping some of you will be able to give me some great advice regarding my current situation.

My goal -

Save money via the quickest possible method to put down a deposit for a house. I am presuming a 20% deposit is going to be required and presently I'd be having to spend around £150k to get something liveable in my area.

My situation -

I graduated around a year ago and after a number of jobs, ive landed and excellent and stable position. I do not have a good / any credit rating as I've never taken out a loan / credit card. I have had a mobile phone on contract. I do currently have a business card card if this gives me some plus points? But my credit rating is something I need to work on before i arrange my mortgage.

Money available -

I am currently paying £750 a month rent (yes I realise I could have gone with something cheaper) but at the end of each month I have min £850 to save / invest but at s push this could be up to £1100 if I made sacrifices.

The question -

And so, my current thinking is that I should get on the property ladder asap as rental costs in my area are rather steep and this is just money wasted. From my uninformed calculations, there would be no way to invest my available money in anyway that would off set the rent payments to make saving for a mortgage deposit not the right move.

So the question is, what is the best way to 'save' for this deposit?

The easiest answer would be just to put it in a savings account, but there must be a better way to make the money work for me while its being invested/ saved. With minimal interest from a savings account I'm looking at around 33 months to save the £30k at £850 a month saved.

I have been looking into the stock market and mutual funds. Am I right in suggesting an estimated 10% return on investment each year? Or is this roi only over the longer term ie 10 years +? As in this case in 3 years saving the same amount I will have a return of £35k.


Any help will be greatly appreciated and I know you guys will come through.

Cheers,

Ray



Money available -

xrjtg

With a time horizon of three years, savings accounts are almost certainly the right way to go. Over the long term you would expect equities to perform better than cash, but what if there's a huge dip three years from now? Needing the money to fund a house purchase doesn't leave you the flexibility to ride out any bumps.

Have a look at Santander's First Home Saver.

emoray

Further research -

Well I'm actively researching as I post here so there may be some updates.

I've found a number of saving accounts that will give 4% interest if I lock my money in for 2 years which is fine. Yes there are savings accounts with a 3 year lock in period however at 4.25% I don't see that extra margin being worth the extra years risk in changes.

So at £850 a month at 4% it will take me around 2.8 years to save the £30k. I must admit I would put in the extra to get it to around 2-2.5 years saving I think, as to me in my current situation even that seems like a very long time!

So thats looking at 2.4 years saving £1000 a month.

Risk -

Risk isn't something i have really mentioned and it's something that I am not averse too. So if there are gains to be had by using alternatives to standard savings accounts / locked in savings accounts i would be more than happy to entertain them.

emoray

xrjtg wrote: »

With a time horizon of three years, savings accounts are almost certainly the right way to go. Over the long term you would expect equities to perform better than cash, but what if there's a huge dip three years from now? Needing the money to fund a house purchase doesn't leave you the flexibility to ride out any bumps.

Have a look at Santander's First Home Saver.

Thanks for your post xrjtd. You mudt have posted whilst I was writing my second update.

EDIT the Santander only allows deposits of between 100 to 300 a month to get that rate, so that one is out.


The Santander saver looks very promising! I've a question with regards to the 5%. I seem to be unable to find a definition of AER, is it average estimated return? This is a better rate than what I've managed to see in general savings accounts but as it's not fixed what is the chance of this changing considerably? (I realise this is a difficult question to answer, however an informed guess will help).

Yorkie1

Given the figures you hope to save each month, I'd make sure I looked at ISAs with a decent % - then the interest is paid without tax being deducted.

xrjtg

emoray wrote: »

the Santander only allows deposits of between 100 to 300 a month to get that rate, so that one is out.

The Santander saver looks very promising! I've a question with regards to the 5%. I seem to be unable to find a definition of AER, is it average estimated return? This is a better rate than what I've managed to see in general savings accounts but as it's not fixed what is the chance of this changing considerably?

I can't quite reconcile these two comments! You're right that the account only takes £300 a month, but the rate is so high that it's worth you running that for the first £300 and some other system for the rest, probably starting by filling up cash ISAs. There's no telling what they'll do with the rate in future, but it's held steady for at least a year now.

AER is the Annual Equivalent Rate. 5% a year paid yearly isn't the same as (5/12)% a month paid monthly due to extra compounding, so to allow easy comparison a standard AER figure is provided that shows what the interest rate would be if interest were paid once a year rather than on whatever timescale the account actually pays interest.

You also mention fixed rate accounts. These also tend to be fixed term, not allowing any withdrawals or further deposits over the term, so they probably aren't suitable for your needs.

If you can stomach running multiple accounts, have a look at the list of best currently available regular savers.

You say you're prepared to accept some risk: if you saved your £30000 over the next 3 years but the investments you bought were only worth £20000 at the end of this time, would you be comfortable with that?

ashaput

i think the best way you can take is by opening a saving account. Personally, what you have found is good enough to do. If I were you I wouls take that.