Warning over Lifetime ISAs as savers risk being fined or ‘frozen out’

First-time buyers taking advantage of a popular government scheme could be forced to choose properties they don’t want or face unfair fines, money experts have warned.

Introduced in 2016, Lifetime ISAs (LISAs) are designed to help people get on the property ladder even as house prices rapidly outpace inflation.

They allow savers to put away up to £4,000 a year which the government will match by 25 per cent – meaning as much as £1,000 can be added tax-free a year (and £5,000 saved).

This is a better ‘interest rate’ than savers could hope to get anywhere else, but it comes with a catch. The savings must only be used for a deposit for a first property which, crucially, cannot be worth more than £450,000.

This amount has remained unchanged since 2017, during which time the average house price has increased by 33 per cent.

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And if LISA holders want to put a deposit down on a property worth more than £450,000 they’ll have to withdraw their money and be fined 25 per cent of the savings.

Research from Martin Lewis’ personal finance service Money Saving Expert estimates that first-time buyers were fined £1.8 million for this last year.

Alarmingly, savers in this position will also find themselves with less to deposit than if they’d never used a LISA in the first place. This is because 25 per cent is fined from the current amount, not what was deposited before the government top-up.

Here’s an example:

Someone has saved £20,000, giving them a government bonus of £5,000 and £25,000 overall. If they want to withdraw their money, they’ll be fined 25 per cent of £25,000, which is £6,250.

After this, they’ll be left with £18,750 – a reduction of £1,250 from what they put in originally.

Recent analysis by investment service AJ Bell shows that there are 54 areas in the UK where the average price of a terraced house is projected to exceed the LISA limit by 2029. In 36 of these, they already have.

Most of these areas can be found in and around London, but some are further afield. Adding to previous campaigns from Mr Lewis, AJ Bell has also now called for the government to change the “unfair” scheme.

AJ Bell investment analyst Dan Coatsworth writes: “Aspiring homeowners could be frozen out of using a Lifetime ISA unless this flaw in the system is fixed.

“Even a typical flat is projected to cost more than the £450,000 limit in five years in 17 regions, including many on the fringes of the capital.

“Increasing the £450,000 limit and ending the unfair exit penalty levied on top of the government bonus would ensure Lifetime ISAs help as many aspiring homeowners as possible.”

A Treasury spokesperson said: “Across the vast majority of the country and in most London boroughs, the average price for a first-time home remains below the £450,000 Lifetime ISA cap.

“We are also committed to building 1.5 million more homes so that people can turn the dream of owning a home into a reality.”