It used to be possible for people saving money for a house deposit to pop the cash aside in a bank account and slowly watch the total build. With a moderate interest rate on offer, over time a gradual stream of deposits would get them to their goal.
But things have changed a bit in recent years. The deposit that many people require has got bigger, and interest rates in savings accounts have been lagging inflation, in lots of cases.
That’s meant many would-be home buyers are looking at other ways to save a deposit, be that KiwiSaver or other investments.
According to the Financial Markets Authority’s 2021 investor survey, 22 per cent had joined an online investment platform either because house prices were unaffordable, and they were looking for another types of investment instead, or to save for a house deposit. Saving for a house deposit was the primary investment goal for 23 per cent of investors surveyed.
If you’re hoping the share market will get you in the door of a first home, there are a few things to think about.
How long are you investing for?
Share markets do tend to deliver better returns than investments like term deposits, over time. But that time factor is really important. Investing in shares is a higher-risk activity, so you’ll need to be prepared for the value of your investment to potentially move down as well as up. It should always recover – but you’ll need to be able to allow yourself time to wait for that to happen.
The longer you have until you need your money, the more risk you may be able to take. You’ll probably want to dial it back as you get closer to the time when you want to cash in your investments and make a purchase. Maybe that will be the time to move into more conservative managed funds or exchange-traded funds, but it depends on your needs and goals. We can help you work out what sort of risk is appropriate for your time horizon.
What are you investing in?
If you’re investing with a set goal, like a house deposit, in mind, you might want to tailor your investment decisions accordingly.
You may look for shares that don’t move around a lot in price but deliver a steady stream of dividends, or you might decide to set aside a smaller part of your deposit to take a moonshot on a new, growth company that could deliver capital gains. Perhaps, a managed fund is a better option.
If you’re investing a significant sum of money in shares, it’s a good idea to talk through a strategy with a financial adviser like us. Diversification will be your friend – by investing in a range of things, the underperformance of one investment asset is likely to have a lesser impact on your portfolio.
How much are you investing?
You may want to consider how much of your deposit you want invested in the sharemarket.
It may be that self-directed shares end up being a small proportion of the overall sum of money you’re saving.
To smooth out market movements, you can make the most of dollar-cost-averaging – putting in a set amount regularly. This means sometimes you’ll be buying shares that are more expensive, and sometimes cheaper but over time it should even out the differences.
Like to talk?
Saving (or investing) a deposit is a big financial milestone. It pays to give yourself the best chance of success by getting your strategy right from the outset. We can help you determine what sort of investment might give you the step up you need, and how to structure it. Get in touch with us today.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.