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How to grow a home deposit in line with house prices

The stock market is down and interest rates are about to enter their eighth year at an all-time low – but the UK housing market just keeps rolling on.

House prices continue to rise

Figures issued by online portal Rightmove at the weekend found that the prices demanded by new sellers have leapt by almost 3% in England and Wales over the past month, pushing the average to almost £300,000.

Of course, asking prices are only part of the picture when it comes to analysing the health of the property market. But with new housing stock still in extremely short supply and the prospect of more economic turbulence playing havoc with the government’s plans to boost home-building, it will be no surprise if prices continue on their upward trajectory.

Property ladder pessimism

This will be particularly bad news for the many thousands of would-be first-time buyers who are desperate to take their first steps on the property ladder. Research published jointly this month by the Association of Residential Letting Agents and the Centre for Economics and Business Research found that a fifth of those currently renting in the UK expect never to be able to afford their own home, with more than half citing difficulties in raising a deposit as their main obstacle.

The organisations also discovered that the typical first-time buyer in 2016 will have spent more than £50,000 on rent – and this figure is likely to increase year-by-year. On average, people who move out of their parents’ home at the age of 18 can expect to rent for 13 years before they can afford to buy.

With house prices on the up and wage growth for younger people in particular lagging well behind, it is no surprise that there is so much pessimism among tenants.

How to build a deposit

But saving a decent deposit is typically the only way to get onto the property ladder, so it is vital to ensure you are going about it in the most effective manner possible.

If you expect to save money into a bank account or ISA and watch it grow into a healthy down payment on your first home, you’re likely to face quite a wait. Savings rates are in the doldrums at the moment, and you’ll be lucky to make more than inflation – never mind about keeping pace with house-price rises.

Better returns should in theory be available by investing in the stock market, but as we have seen recently, high levels of volatility could eat into your capital. And what if the market were to slump just as you were about to cash in your holdings to help you buy a house?

Exploring alternatives

With less risk than the markets and better returns than you’ll get from the banks, peer-to-peer lending could be an excellent way to grow a deposit. The typical annual interest rate offered by Zopa is 5% at the moment, and from April you’ll be able to get this free of income tax by lending up to £15,240 a year through an Innovative Finance ISA.

Research published last year showed in fact that Zopa outperformed even the UK housing market in the decade from 2005, when the platform was set up, giving a 70% return on investment compared to a 30% return from the housing market.

P2P lending is ideal for the sort of medium-term capital growth needed to generate a decent-size deposit. If house prices remain on their current trajectory, would-be buyers are going to need all the help they can get.

Visit our lending pages to find out more.

With peer-to-peer lending, your capital is at risk.