Placing just a 5% mortgage deposit makes more financial sense when it comes to the potential annual return versus investing in a one-year fixed ISA, according to a recent study by gradual homeownership provider, Wayhome.
Despite the continuous hike in interest rates, some lenders still offer the opportunity to climb the property ladder with just a 5% deposit, as does Wayhome’s Gradual Homeownership scheme.
The research shows that a 5% deposit would have yielded a stronger return on investment over the last year compared to a one-year fixed ISA, despite the latter being specifically designed to boost one’s savings pot.
Over the past year, the average UK house price has risen by 9.8%, from £268,115 to £294,329, despite increasing mortgage rates and a cooling rate of house price growth.
In contrast, investing the same amount of money into a one-year fixed ISA at the average rate of 0.43% would have returned just £58 on the original investment.
A year ago, a 5% deposit would have required buyers to put down £13,406 when securing a mortgage, but that same 5% investment alone would have increased to £14,716 in value today, a return of £1,311.
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%.
The study also found that buyers who invested in property in the East Midlands and North West have seen the strongest returns on a 5% deposit, with an increase of 11.8% in the last year, surpassing the performance of a one-year fixed ISA.
Other regions such as Yorkshire and the Humber (+11.3%), the North East (+11.3%), and the West Midlands (+10.3%) have also seen strong property market returns on a 5% deposit compared to those available through 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.
“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,” said Nigel Purves, co-founder, and CEO of Wayhome. “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 an ISA.”
The study has attracted attention from both potential homebuyers and financial experts. Commenting on the findings, Olu Olufote, founder and CEO of SmartPurse, a digital platform that educates women on financial literacy, said: “If you’re looking to build wealth over the long term, property ownership is a solid option to consider.
“This research highlights that even with the smallest of deposits, you could make significant gains in comparison to other savings options such as fixed-rate ISAs.
“This is something for both first-time buyers and long-term property investors to keep in mind when considering their financial goals.”
