Buying your first home

The Lifetime ISA, and its twelve-month trap

A Lifetime ISA gives you a 25% government bonus on up to £4,000 a year. Save the full amount and you get £1,000 free, every year, towards a first home.

It's one of the best-value products available for this purpose, and it comes with a rule that catches people constantly.

The account must have been open for at least 12 months before you can use it towards a property purchase. Someone who opens one two months before completing gets nothing, and pays a withdrawal penalty for taking the money out.

The fix costs almost nothing: open one with a small amount as soon as buying a home is even a possibility, years ahead if necessary. The clock starts from opening, not from when you fund it properly.

The other conditions:

• You must be 18 to 39 to open one
• The property must cost £450,000 or less
• It must be your first home, and you must intend to live in it
• You can contribute until you're 50

The penalty is the bit to understand. Withdrawing for anything other than a first home before 60 incurs a 25% charge — and because it's charged on the whole withdrawal rather than just the bonus, you get back less than you put in. If the property you want costs more than £450,000, you're penalised for having saved into the right product for the wrong house.

Where to keep the deposit

If you're buying within about three years, the deposit belongs in cash. Not investments.

The reason isn't that investing is bad — it's that a 20% fall the month before you exchange has no time to recover, and it doesn't just cost you money, it costs you the house. See Risk and diversification.

A cash Lifetime ISA, a cash ISA or a straightforward savings account are all reasonable. Shop around, because the gap between a current account and a competitive savings rate is substantial.

What you actually need beyond the deposit

The deposit is the number everyone focuses on. The costs around it routinely surprise people:

• Stamp duty, though first-time buyers have relief up to a threshold
• Solicitor's fees and searches
• Survey, and it's worth paying for a proper one rather than the lender's basic valuation
• Mortgage arrangement fees, sometimes addable to the loan, which costs more over time
• Moving costs, and the things you discover you need in the first month

Budget for these separately from the deposit, and don't let them come out of your emergency fund. See Your emergency fund — moving into a house with no cash behind you is how a broken boiler becomes credit card debt.

What lenders actually look at

Affordability, not just income. They stress-test whether you could still pay if rates rose, and they count your committed outgoings — car finance, loans, childcare, subscriptions.

Your credit file. Check it before applying, at any of the main agencies. Errors are common and take time to correct.

Deposit size, which sets your loan-to-value band. The rate improves at each threshold — commonly 95%, 90%, 85%, 80%, 75% and 60%. Finding another small amount to cross a band can be worth more than months of extra saving.

Where the deposit came from. Gifted deposits are fine but need documenting, usually with a letter from the giver confirming it's a gift rather than a loan.

The protection nobody mentions

This is the part that gets skipped, and it's the part that matters if things go wrong.

You've just taken on a debt that will outlast most other commitments in your life. If you have a partner or anyone depending on you, life cover matters from the day you exchange, not from the day you get round to it.

Life cover is cheap for a healthy person in their twenties or thirties. Meaningful cover often costs less than a phone contract.

Income protection matters more than life cover for many first-time buyers, because being unable to work is far more likely than dying. The mortgage doesn't pause because you're ill.

Both take weeks to arrange, because underwriting takes time. Starting the process at exchange rather than after completion means you're covered from the moment you're liable.

Do not buy this from your lender without comparing. See Where to start with protection.

Fixed or variable

A fixed rate gives you certainty for a set period. A tracker moves with the base rate.

There's no universally right answer, and anyone claiming otherwise is guessing about interest rates. What matters more for a first purchase is whether you could cope if the payment rose — and if the honest answer is no, that's an argument for fixing, and possibly for borrowing less.

Watch the early repayment charges on any fixed deal, and think about whether the term matches your plans. A five-year fix is poor value if you'll move in two.

After you've bought

Two things worth doing in the first few months, when nobody feels like doing anything:

Make a will. Particularly if you bought with a partner you're not married to, because unmarried partners inherit nothing automatically.

Check how you own it. Joint tenants means the survivor automatically inherits. Tenants in common means each share passes under a will, which matters if you contributed unequally or have children from a previous relationship. Your solicitor should ask; make sure you understand the answer.

This page is for general education only and isn't personal advice. Mortgage and Lifetime ISA rules have conditions and penalties that depend on your circumstances.