Thinking about buying a home sometime in the future? You might be considering all the ways you can get there. The deposit is a key step in the home-buying process, as it allows you to secure your property. But saving for one isn’t exactly easy, which is why many turn to alternative routes to try and expedite their journey. In this article, we’re exploring the idea of investing for a home deposit, looking at the potential pros and cons, and covering how to get started.

Your long-term investment options

At Pearler, we’re all about making investments for the long term. For us, this means buying and holding investments for at least several years (or even decades). Over that time, the investments would ideally achieve strong growth through the powers of capital appreciation, compound interest and dividends.

Capital appreciation, or capital growth , is where the value of your investments increases over time, allowing you to sell at a higher price. Compound interest is where you earn interest on the interest of your investments, potentially leading to exponential growth. And dividends are a form of passive income paid by some companies or funds when you invest in them.

As far as long-term investments go, you have numerous options to choose from on Pearler. These include Exchange-Traded Funds (ETFs) , shares, Listed Investment Companies (LICs) , and Real Estate Investment Trusts (REITs) across Australia and the US.

The potential benefits of investing for a home deposit

Investing for a home deposit could be advantageous for a number of reasons, such as:

• The potential for higher returns: Many opt for share investing because of its potential for solid returns. Historically, the share market has grown around 6-9% per year. On the other hand, most savings accounts see returns of about 4-5% per annum. Adjusted for inflation , share investing typically has a better track record of outperforming inflation than savings accounts do. On a long enough timeline (more on that later), this could mean achieving your goal of home ownership
• The magic of compound interest: As mentioned earlier, compound interest is the interest earned on both your principal (original amount) and the interest you earn over a certain term. You might associate compound interest with savings accounts or loans, but it can also apply to investing. In this instance, though, it relates more to returns. With investing, it’s the amount earned on your initial investment, the capital growth of that investment and, if you re-invest your dividends, the returns on those, too
• A wide choice of investment options: There are many choices on the stock market to suit a range of investing strategies, risk tolerances and investing horizons
• Diversification. On the subject of investment options, investing allows you to diversify – potentially reducing your overall risk. Diversification is where you spread your money across different assets, sectors, geographies, and other differentiating factors. Doing so means that if one or several of your investments perform poorly, others may be able to offset any losses

The risks and drawbacks of investing

While investing does have its drawcards, it also comes with a few risks. Here are some things to keep in mind when investing your money.

• Market volatility and the chance of losing your money: The natural fluctuation of the market is one of the biggest risks of investing. The value of your investments can go up and down due to various factors, and there’s always a chance of losing your money. Be prepared for that possibility. This is especially the case in the short term, so you’ll need to be OK with holding on to your investments through market downturns for the potential for long-term gains
• Broader economic conditions: Investments are often vulnerable to economic conditions that are entirely out of your control. These include interest rates, geopolitical tensions, inflation, and black swan events like wars, natural disasters and recessions. During these times, the value of your investments may decrease
• A longer investing horizon: It typically takes many years, maybe even a decade or so, for substantial investment returns to materialise. Investing may be a better option if you’ve still got years before you plan to buy a home
• Investing fees: There are several fees involved with investing , depending on what you invest in. One cost that you’ll likely bear is brokerage, which is the fee for executing a trade. If you invest in ETFs or managed funds, you’ll be up for management fees, too. (With ETFs, this is known as the expense ratio.)
• Tax implications . Earnings you make from investing will be subject to tax. The main consideration is capital gains tax (CGT) , which is a tax you pay on investing profits. The second is the tax associated with dividend payments, as these are treated as income and added to your taxable income in the financial year you receive them

How investing compares to saving for a home deposit

Out of the two, saving is the more traditional route towards home ownership – often in a high-interest savings account or term deposit. But how does it stack up to investing?

Here’s the TL;DR comparison of the two, but you can also check out our guide to investing versus saving for a home deposit for a deeper dive.

	Investing	Saving
Time horizon	Long term – 10+ years	Short to medium-term – 3-5 years
Potential returns	Historically, 6-9% pa (but past returns don't indicate future performance)	4-5% pa on average
Risk	Riskier than saving	Low risk – the government guarantees your money up to $250,000
Fees	Brokerage, management fees	Account fees, withdrawal fees, early withdrawal fees (for term deposits)
Tax implications	Capital gains tax and tax on dividends	Interest is subject to tax
Inflation	Has traditionally stood a better chance of outpacing inflation (learn more in our article: Are shares inflation-resistant? )	Slim chance of beating inflation – could even lag behind

Things to think about before investing for a home deposit

Before you chuck all your hard-earned home deposit savings into the stock market, you’ll want to consider a few important factors like:

How to get started

Keen to give it a try? Here’s how to start investing for a home deposit.

Step 1: Establish your goals and timeline

Your first step is figuring out how much you’ll need for a home deposit and when you plan to purchase your home. Once you have these locked in, you’ll have a clear target to work towards, which provides you with a sense of direction and motivation. It also allows you to work out how much you’ll need to invest regularly, and how often, to achieve your goal.

You can use our Investing Amount Calculator and Investing Frequency Calculator to help you determine both your ideal investing amount and ideal investing frequency to reach your home deposit. However, keep in mind these figures are general, and don't account for your specific circumstances.

Step 2: Assess your risk tolerance

We’ve put together an entire guide to figuring out your risk tolerance . But in a nutshell, it involves considering your investing goals and timeline, and how comfortable you are with potential losses.

Your risk tolerance is one of the biggest factors for determining what you invest in. For example, someone who's risk-averse might opt for more comparatively conservative investments, like bonds and ETFs that track major indexes. Alternatively, someone who thinks they can take on more volatility may be at ease with higher-risk investments like growth shares in specific companies .

Step 3: Invest

Now it’s time to actually start investing. Once you’ve figured out your home deposit target, timeline, and risk tolerance, you can start choosing investment options to match.

If you’re investing with Pearler, you could pick individual shares, ETFs, LICs, REITs, or other asset classes. These can be from the US and Australia, across a range of popular industries and sectors . You could also consider automating your investments to allow you to be more hands-off.

Check out our article on popular investing strategies to get an idea of how you could approach your investing journey.

Step 4: Monitor and maintain your portfolio

After you’ve invested your money, it’s important to stay on top of your portfolio. This means monitoring it regularly to ensure it continues aligning with your goals, and potentially rebalancing your investments if you need to.

You might also want to keep abreast of market trends, economic news and world events that could impact your portfolio.

Should you invest to buy a home?

Investing could potentially be a viable option for achieving your home deposit. However, you'll need to ensure you’re fully across it before diving in. Understand the pros and cons of investing. Think about your own circumstances that could make investing worthwhile or worrisome. And ultimately, consider what your objectives are in terms of financial growth and security.

If you need a personalised helping hand with investing, never hesitate to reach out to a licensed financial adviser. (Side note: financial advisers can be useful for assisting you with reaching your property goals, too.)

Happy investing!