How to invest for your first home

Authored on
10 Aug 2023



A few articles ago we focused on financial goals and how important they are when investing. One of the very first financial goals many people aim for is buying their first home. But what does that involve and how does investing for it work? Let’s take a look. 

Sizing up your first-home goal 

Financial goals can look very different depending on the person, but one goal seems to bring us all together – owning our own home. And this isn’t showing any signs of changing. Although average house prices have shot up over the past 10 years, first-time buyers haven’t been deterred, snapping up 53% of all house sales in 2022, according to Yorkshire Building Society. So, everybody wants to get their foot onto the first rung of the property ladder, but the big question is how?  

This is where house deposits enter the equation. Before a bank or building society is prepared to lend you enough money to buy your home, you’ll usually need to contribute a percentage of the purchase price from your own pocket. Which brings us onto another figure: £61,000. This is the average deposit needed to buy a first home in the UK last year, according to statista.com.  

Since they can run into the tens of thousands, deposits often take many years to save for, though this does depend on the house value and size of your mortgage. While there are a few government schemes available to give first-time buyers a leg-up, and some ‘no-deposit’ mortgages have popped up again in recent months, the best deals out there will usually require a deposit. And the general rule of thumb here is the bigger your deposit, the smaller your mortgage and monthly repayments will be. 

Building your house deposit 

Saving or investing…or both? 

Starting to build up your house deposit is as simple as saving what you can, when you can. Saving little and often after each paycheque can work well and gets you into a regular routine. Or save bigger amounts in bursts when it feels doable – or both! See what feels right for you and how you manage your money. 

After you’ve put that money aside, you could choose to invest those savings to give them the chance to grow and potentially boost your deposit. But – and this is a big ‘but’ – if you’re planning to buy in less than five years’ time, you might be better sticking to cash rather than investing. The reason for this is investments can go down as well as up in value, and the chance of taking out less than you put in is higher when you invest over shorter periods.  

An important question to ask yourself before investing for your deposit savings is do you have enough time to do it? If your answer is yes, and you understand the risks involved, your next step is opening an investment account and getting started. But if you’re planning on buying sooner rather than later, the safer option of interest-paying cash savings accounts may be the smart choice. And of course, there’s nothing to stop you doing a little of both: investing AND saving towards your first home. 

Which account to choose? 

Let’s start with Lifetime ISAs (LISAs). LISAs were brought in by the government in 2017 and are unlike any other type of individual savings accounts (ISAs) available today. They are THE savings and investment accounts for future first-time buyers, offering an incredibly attractive 25% bonus on top of the amount paid into them. But when the government’s giving you a bonus like that, there are strings attached and it’s important not to get tripped up by them. So do check it’s the right type of account for you, before jumping in. 

Lifetime ISAs come in two varieties: cash or stocks and shares (also called investment LISAs), and both come with the 25% bonus. But it’s only the stocks and shares variety that lets you invest your savings into funds and shares. There are just a few providers of stocks and shares LISAs around, with AJ Bell and Dodl being two of them. AJ Bell’s LISA offers a wide variety of investment options, managed by you via the website or in-app. Whereas Dodl’s LISA is app-only and offers a much simpler range of investments - but with a slightly lower charge attached. 

Due to the cap on the amount you can save into LISAs each year (£4,000), and the huge range of other savings and investment accounts out there, it’s a good idea not to limit yourself to a LISA if possible. You could even use another type of ISA to help you save for your first home. Cash ISAs or stocks and shares ISAs (if you’re investing) may be good options for squirrelling away some extra pennies. Just bear in mind the overall ISA allowance of £20,000 – you can’t save more than that across all your ISAs, including your LISA, in any given tax year. 

Getting ready to buy 

Let’s fast forward to the moment you find that dream first home. Perhaps even your offer’s been accepted, and things have just got serious! The thing to remember at this stage is the buying process has the potential to be quite lengthy and expensive. That means, if you can, it’s a good idea to carry on saving into an easy-access account during this time. However, buying any new investments with your deposit savings at this point would be a very risky move, given the minimal time you have before you’d need to access that money. 

The key thing is getting started 

Like all investing, when you’re doing it for your first home there are a fair few decisions to make and this can feel a tad overwhelming. But the key thing is getting started with chipping away at your deposit target. Start small if that feels more manageable – you can invest from as little as £25 a month. And you can always spread your risk by saving into an interest-paying cash savings account alongside your investments.

Remember that the value of investments can change, and you could lose money as well as make it. How you're taxed will depend on your circumstances, and tax rules can change. Tax and LISA rules apply. 

A Lifetime ISA isn't for everyone. If you withdraw money before age 60, unless it's to buy your first home, you'll pay a government withdrawal charge of 25%. And if you choose to save in a Lifetime ISA instead of enrolling in, or contributing to, your workplace pension scheme, you'll miss out on your employer’s contributions. Your current and future entitlement to means-tested benefits may also be affected. 

These articles are for information purposes only and are not a personal recommendation or advice.