Saving for a deposit can feel like the biggest obstacle to buying your first home. However, a Lifetime ISA could help eligible first-time buyers increase their savings with a Government bonus of up to £1,000 each tax year.

How does a Lifetime ISA work?

You can save up to £4,000 into a Lifetime ISA during each tax year, and the Government adds a 25% bonus.

This means:

• Save £1,000 and the Government adds £250

• Save £2,000 and the Government adds £500

• Save the maximum £4,000 and the Government adds £1,000

Someone saving the full £4,000 for three years could build a pot of £15,000: £12,000 of their own savings plus £3,000 in Government bonuses, before any interest or investment growth.

If two eligible first-time buyers are purchasing together, they can each use a Lifetime ISA. Together, they could potentially receive up to £2,000 in Government bonuses every year.

Who can open one?

You must be aged between 18 and 39 to open a Lifetime ISA. Once opened, you can continue contributing and receiving the Government bonus until you reach 50.

Lifetime ISAs are available as cash accounts or stocks and shares accounts. The most suitable option will depend on how soon you expect to buy and how comfortable you are with investment risk.

What are the rules when buying a home?

To use a Lifetime ISA towards your first-home purchase:

• The property must cost £450,000 or less

• You must be buying your first home

• The property must be purchased with a mortgage

• At least 12 months must have passed since your first Lifetime ISA payment

• The money must be paid directly to your solicitor or conveyancer

This makes it important to open the account early. Even making a small initial payment can start the 12-month qualifying period.

Watch out for the withdrawal charge

A Lifetime ISA is not the same as an ordinary savings account.

If you withdraw the money before reaching 60 and are not using it for an eligible first-home purchase, you will normally face a 25% withdrawal charge.

Because the charge applies to the entire amount withdrawn, it does more than simply recover the Government bonus. You could receive back less than you originally saved.

For example, if you contribute £4,000 and receive a £1,000 bonus, your balance becomes £5,000. A 25% withdrawal charge would be £1,250, leaving you with £3,750.

Your deposit is only one part of the calculation

Building a deposit is an important step, but it does not automatically mean you will be able to borrow enough to purchase the property you want.

Mortgage lenders will also consider:

• Your income and employment

• Existing loans and credit commitments

• Your credit history

• Regular household expenditure

• The proposed mortgage term

• The type and condition of the property

Speaking to a mortgage adviser early can help you understand how much you may be able to borrow and whether your savings target is realistic.

Planning to buy your first home?

At Chetwood Lloyd Mortgages, we provide independent, fee-free mortgage advice and have access to more than 100 lenders.

We can review your circumstances, explain how much you may be able to borrow and help you build a clear plan towards purchasing your first home.

Get in touch to arrange an initial conversation.