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Wednesday, 5 June 2019

Help To Buy Isa vs Lifetime Isa - Which One Should You Choose?

A few days ago I was sat thinking about what I want to achieve before the age of 30. Don't get me wrong, I've got a while to go (nine years to be exact) but I always love setting myself new goals and working towards ambitions, especially since I've found that my mindset and where I want to go in life has shifted massively in the past few months.

One of my main goals I wrote down was that I want to start saving for a mortgage and buy my own home just outside of London. This led me into researching about the two main mortgage government schemes currently in place in the UK, the Help To Buy Isa and the Lifetime Isa, so I've drawn out the main information along with the pros and cons of each to help anyone else looking to invest in a first-time mortgage too!

Help To Buy Isa
In order to open a Help To Buy Isa, you must be 16 or older and have not previously owned or inherited a property anywhere in the world.

With this isa the government will top up your savings by 25% of tax free interest up to a maximum of £3,000 to go towards either a preowned or brand new property worth up to £250,000 (or up to £450,000 in London). In the first month you can only invest a maximum of £1,200 and can only use your money to purchase a property after 3 months of opening the account.

The limitation to this isa is that saving for your property can be very slow due to the amount you can invest. After the first month, you are only able to contribute £200 per month, resulting in a total investment of £2,400 per year, which is pennies towards a property. Therefore this option is more suited to those not looking to purchase a property in the near future. Another limitation of this isa is that you cannot put the bonus that the government gives to you towards the deposit, it can only be paid upon completion.

Despite the cons, the main benefits of the Help To But Isa is that you can withdraw your money at any time, penalty free, meaning if you choose to spend your money on something else or need it as an emergency, you can receive back all the money you invested. It is also free to switch isa providers if you find a better rate offered by another bank. In other words, you do not make any losses on the money you invest. 

It is important to note that applications for this isa will close on November 30th 2019 (my birthday, lol). So if you are wanting to invest, you should open an account sooner rather than later, even if you only invest £1 to open the account (this is the minimum you can invest). Despite closing applications, Help To Buy Isa's will still be operating for the next 10 years for those with accounts. 

Lifetime Isa
The Lifetime Isa was introduced in December 2015 and was created essentially to replace the Help To Buy Isa. This type of isa can be spit into two uses, to help save for mortgages and also for retirement, but in this post I am only going to be focusing on using it for property.

To open this isa you need to be between the ages of 18 and 39. You can open the account on the day of your 18th birthday and the day before your 40th birthday. Again you can only apply for this isa if you have not previously owned or inherited a property anywhere in the world and can only use this isa to purchase properties to a maximum of £450,000.

One of the biggest pros of this isa compared to the Help To Buy Isa is that you receive a bigger bonus as you receive 25% plus a 1.1% AER interest rate. Along with this you can invest a larger sum of money up to £4,000 a year, giving you a return of just over £1,000.

Once an account has been opened, you have to wait 12 months until you can use it towards purchasing a property. Once you have withdrawn the money to do so, the purchase needs to be complete within 90 days otherwise you will be charged 25%. It is important to note that the government bonus can take around 4 to 9 weeks to arrive in your account, so if your purchase completes before this then you will be charged.

The penalties are the main cons of this type of isa as you will lose 6.25% to withdraw the whole amount of money you have invested if you need it, or you will be charged 25% of any money you wish to withdraw (which isn't the full amount) before buying your home. You will also be charged if you choose to switch isas.

I hope this helped anyone looking into investment into properties!
Have you started looking into buying property? Or do you already own a property? Let me know in the comments!

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