Lifetime Isas become worthless for first-time buyers

Lisas are not keeping track with soaring house prices, penalising diligent savers with their exit penalties. By Alexa Phillips

Lifetime Isas have become punitive for home buyers due to soaring house prices, new research has found.

Savers in some areas will be forced to pay an exit fee to use the money they have saved to get on the property ladder because prices are too high.

This is because money saved in Lisas can only be used to fund the deposit on a first home that costs up to £450,000. If the property they buy is worth more than this, they must sacrifice some of their savings.

House prices have risen by as much as 41pc in some areas since the Lisa threshold was set in 2017, but the £450,000 limit has not been increased.

Buyers in London are the least likely to be able to use Lisas, according to analysis by Nutmeg, an investment service. The average house price in the capital was £537,920 in June – an increase of more than 10pc since 2017.

Another expensive area was Guildford, where homes rose 13pc to £ 514,528. Buyers face high prices in Cambridge (£506,804), Chichester (£475,825), Oxford (£473,527) and Winchester (£472,905). The rises in the past five years were between 11pc and 26pc.

If the price cap is not increased, the scheme could soon leave out buyers in Brighton and Hove, Bath and Watford.

The benefits of a Lisa are numerous: under the scheme, anyone aged 18 to 39 can put up to £4,000 a year into this type of account and receive a 25pc bonus of up to £1,000 from the Government, for buying a home or for retirement after the age of 60.

But savers face a 25pc charge on the whole sum if they want to withdraw it. This is an effective exit fee of 6.25pc of savers’ own money, leaving them worse off than they were to start with.

Tory MP Kevin Hollinrake, chairman of the cross-party group on fair business banking, said the Lisa’s house price cap should be indexed to property values to reflect the current market rather than the one in 2017.

He said the scheme was “bound to be less effective and not meeting the original purpose”, adding that the Government should take back its 25pc bonus if people choose to withdraw their money but not to charge a 25pc penalty on the entire sum in the account.

Sarah Coles, of investment broker Hargreaves Lansdown, said the Government should consider linking the limit to house price inflation or introducing regional variations.

She added that it should cut the withdrawal penalty to 20pc if savers are no longer able to use the scheme.

“It’s not fair to penalise savers for trying to do the right thing, especially when they’ve been wrong- footed by something out of their control,” she said.

Earlier this month, the expert who came up with Lisas said that savers should be allowed to raid them without incurring a steep penalty charge in the face of the cost of living crisis.

The penalty was temporarily lowered to 20pc in March 2020 to help savers during the pandemic, but this was reversed in April last year.

‘It’s not fair to penalise savers; they’ve been wrong-footed by what’s out of their control’