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Homebuyers save more by spending, as 5% deposit yields stronger returns than a fixed rate ISA

by | Mar 11, 2023

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Research by the Gradual Homeownership provider, Wayhome, has revealed that placing just a five per cent mortgage deposit makes more financial sense when it comes to the potential annual return versus investing in a one year fixed ISA, earning UK savers £1,253 more per year. 

While continuous hikes to interest rates have seen many mainstream lenders remove their high loan to value products, some still offer the opportunity to climb the ladder with a deposit of just 5%, as does Wayhome’s Gradual Homeownership scheme. 

Although it may seem like the smallest of margins when it comes to homeownership, Wayhome’s research shows that a 5% deposit would have still yielded a stronger return on your investment over the last year versus a one year fixed ISA – despite the latter being specifically designed to boost your savings pot. 

In fact, over the last year, the average UK house price has jumped by 9.8%, up from £268,115 to 294,329, despite increasing mortgage rates and a cooling rate of house price growth.

 
 

A year ago, a 5% deposit would have required buyers to put £13,406 down when securing a mortgage, but today, this 5% investment alone would have increased to £14,716 in value, a return of £1,311.

In contrast, investing the same £13,406 into a one year fixed ISA at the average rate of 0.43% would have returned £13,463 over the last year, a boost of just £58 on the original investment. 

As a result, investing in the average UK home with a 5% deposit has proved far more lucrative over the last year, outperforming the one year fixed ISA by £1,253 or 9.3%. 

 

Savers stand to make the most by spending on property in the East Midlands and North West, where the increase seen on a 5% deposit over the last year has outperformed the performance of a one year fixed ISA by 11.8%. 

Yorkshire and the Humber (+11.3%), the North East (+11.3%) and the West Midlands (10.3%) have also seen some of the strongest property market returns on a 5% deposit versus those available via ISA investment. 

In Scotland, the average buyer placing a 5% deposit would have seen a 5.7% increase over the last year, returning £508 on their original investment of £8,853 – the lowest of all areas of the UK. 

But even still, this more marginal bricks and mortar equity boost is still £470 higher than the return they would have seen making the same investment into a one year fixed ISA.

Co-founder and CEO of Wayhome, Nigel Purves, commented: “Property has always made for a sound investment but with house prices starting to cool in recent months, some buyers may be pondering whether now is the right time to buy. 

“Especially given the fact that a string of interest rate hikes have pushed up the cost of borrowing over the last year, while also improving the returns seen across the wide variety of savings products available to the nation’s savers. 

“However, as our research shows, even the most marginal of property investments is likely to yield a far stronger return when compared to investing in a one year fixed ISA.

“So while there may be a great deal of noise about the benefits of ISA investment as we approach April’s deadline, those who are able to overcome the initial barrier of saving a deposit are far better off looking to the property market.

“Of course, it is this initial barrier that prevents many from making their move and the nation’s buyers are up against in the current climate due to the lack of low deposit mortgage products available to them. 

“In fact, mortgage products with a 95% loan to value account for around 5% of all mortgages currently available and those who are able to utilise them are likely to find that their borrowing potential based on their income will also limit the choices available to them when climbing the ladder. 

“As a result, the unfortunate reality is that the vast majority of buyers will have to save a substantially larger deposit before they can buy, and benefit, from the consistent performance of the UK property market.”

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