I’m buying a house in three years. When should I switch my deposit from investments into cash?

Why timescale is important to consider before tying up your money into long-term investments

I have been investing using a Stocks and Shares Isa for the past five years to save up for a house. I hope to have enough for a deposit in another three years. Should I cash in my investments now? I thought the advice was to invest only if you have at least five years to invest — but is this from the point at which you start investing or from the time at which you will need the money?

Initial diagnosis

It’s an important question as investment timescales are an important factor, according to Martin Bamford, a chartered financial planner at Informed Choice.

“Investing involves exposure to market volatility, so it’s usually a bad idea to invest for short-term financial goals,” he says. “Instead, cash tends to be a much better-suited home for your money.”

For most people, it’s about striking the right balance between holding money in cash and investing in stocks and shares.

While the stock market is likely to deliver a better long-term return, you can lose money over shorter periods. Cash, meanwhile, will not earn as much but is a safer option.

“When buying a property, you need greater certainty about the amount of money available than investment markets can typically offer,” adds Bamford.

In fact, he suggests a time horizon of seven to 10 years is needed before he’d recommend investments over cash. “I know that cash gets a lot of bad press these days, owing to low interest rates and eroding price inflation, but it’s impossible to beat if you need certainty,” he says.

Treatment plan

The best approach will largely depend on how close you are to your target, says Patrick Connolly, a chartered financial planner at Chase de Vere.

“If you’re on track to have enough money for your mortgage deposit in three years – and will need to access the money then – you should reduce the risks you are taking,” he says.

This can be through holding other assets alongside shares, such as fixed interest and property, or by moving some, or all, of your money into cash.

However, if moving into cash means it will take longer to build up your mortgage deposit then there is an argument for keeping more of your money in stocks and shares.

You should also consider how a 10% or 20% fall in the value of your investments will affect your chances of buying a house, according to Adrian Lowcock, head of personal investing at Willis Owen.

“The biggest risk is you experience a big sell off in the markets just as you are about to cash in, meaning your dream is delayed,” he explains.

Staying invested or switching completely into cash are not the only options. You can also phase your move into cash, change investments, or put off making a final decision for another year until the outlook is clearer.

However, Lowcock argues that the possibility of getting a 6% annual return will be outweighed by the possibility of not getting on the property ladder.

“The key is to reduce exposure to the stock market, putting some money in cash and every so often taking a bit of money out of the markets,” he explains.

Alternative treatment plan

Consider a cash-based Lifetime Isa if you’re buying your first home, suggests Scott Gallacher, director of Rowley Turton Private Wealth Management. You must also be 18 or over – and under 40 – to open one.

“You can put in up to £4,000 each year, until you’re 50,” he says. “The Government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.”

It also depends on whether your three-year timescale is set in stone, according to Justin Modray, director of Candid Financial Advice. If it is flexible, you could consider waiting for an opportune moment.

“Given the current market downturn over coronavirus fears, I would be minded to sit tight and ride that out, in hope of a market rebound at some point,” he says.

However, there are risks. “This will hopefully happen during the next three years, although it’s impossible to know due to the huge uncertainty surrounding the virus,” he adds. 

Modray insists the key is taking risk off the table once you are satisfied with the level of returns that have been generated.

“Don’t be tempted to hang in there seeking more returns in case there is a market downturn around when you want to buy a house,” he adds. 

Do you have a question for the Investment Doctor? Email editor@ moneywise.co.uk.