Where should my housebuying money live?
In preparation for buying a house, I moved approximately £1m out of stocks into cash. The sale fell through and I am now searching for a house again. I do not know when I will need these funds next: it could be two months or three years. What investments could I make to maximise return and access while managing risk for this amount?
Many people who have money set aside for a future house purchase will find themselves in this situation.
Adrian Lowcock, investment director at Architas, says your key aim should be to protect the value of your savings while maintaining your purchasing power in the property market. The problem is that if you believe that property prices will rise, you will need to take some risk with your money to maintain your achieve this. The risk with short-term investment is that the value of your investment will fall and you could, on a bad day or week, lose 10 per cent or more.
The worst-case scenario is that, if you need the money at short notice, markets might not have had time to recover all the lost ground and you could end up with a smaller sum than you started with. While falls of that magnitude don’t happen often, they are not that uncommon and it is better to be prepared for the worst than let it catch you by surprise and you miss out on the opportunity to buy the property you want.
It is not recommended to put money into investments for anything less than one year, so the best solution for the money is to spread it around in some short-term assets such as cash accounts, notice accounts and possibly money market funds or short duration bond funds.
It is also worth remembering that only £85,000 of cash deposits can be held with one financial institution and fall under the protection of the Financial Services Compensation Scheme. Sometimes, more than one bank is covered under one registration as a financial institution so you would need to make sure each bank is individually covered. Given the sums involved, you may be best advised to open joint accounts, as this would double the protection amount for each institution between you and your partner.
Ben Yearsley, director of Shore Financial Planning, says your attitude to risk and timeframe are important. If you really think the money will be needed in the next few months and you don’t want to take any risk, there really aren’t many options.
In your case, with £1m, the first £50,000 should be put into premium bonds and the balance either into a National Savings Direct Saver account, currently paying 0.7 per cent and guaranteed up to £2m, or spread around a series of the best bank and building society accounts.
You might consider taking advantage of services such as Savings Champion, which essentially move your money around for you to gain access to the latest top rates. Before or after tax, though, your money in cash will shrink in real terms. On the flip side, if you think house prices will fall, being in cash would be the best option.
However, if you want to take some risk with your money, there are a few suggestions. I would still put £50,000 in premium bonds as even at the miserly prize rates, since the returns are tax-free, your money is safe and can be accessed within a matter of days.
In terms of investments, I would rule out “full on” equity funds as the time span is too short. My first suggestion is the M&G Global Floating Rate High Yield fund. I’m not a great fan of fixed interest: as we move into an era of higher rates it becomes harder to protect capital values. However, the M&G fund invests in bonds where the interest rate paid is linked to the base rate.
With a normal bond carrying a fixed coupon, capital values fall as interest rates rise. With a floating rate bond, the capital value will largely stay unchanged regardless of what base rates do. It isn’t an exciting fund, yielding about 4 per cent, but it has the chance to beat cash while taking some risk.
Another fund to consider is the Invesco Perpetual Global Targeted Returns fund which has the aim of beating three-month Libor by 5 per cent each year, with much lower risk than equities. There are a number of similar funds from Standard Life and Aviva, but this is my favoured option. It is effectively trying to eke out small returns from specific ideas such as the dollar outperforming sterling, or Swiss equities beating French equities.
One final fund to consider is Troy Trojan or its sister investment trust Personal Assets. The primary aim of these two is to protect the real value of the capital, the second is to see it grow. There will be a mix of shares, bonds, gold and cash. Currently, the equity weight is fairly low due to the managers’ view of equity valuations.
So those are some mainstream ideas, and now for something completely different — crowdfunding bonds. Returns on offer vary between 3 per cent and about 15 per cent. The higher the rate, the greater the risk and the more chance of losing capital. Downing Crowd Bonds currently has two bonds available paying 3 per cent annual interest with monthly access — a short enough time to get your money back for any house purchase.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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