- Property limit for Lifetime ISA would be £562,500 if it had risen with house price inflation
- Someone who saved the maximum since launch would lose £2,250 of their money for breaching the limit
- Lifetime ISA property limit could be aligned with first-time buyer stamp duty break at £625,000
- Government should also cut withdrawal charge to 20%
Laura Suter, head of personal finance at AJ Bell, comments:
“Despite a surprise jump this week the overall trend for house prices has been down over the past nine months. That, coupled with some more certainty around the path for Base Rate, means that many first-time buyers might be finding it an altogether more comfortable environment to buy their first property than a year ago. There’s no getting away from the fact that mortgage rates are still high and that high rents have squeezed many people’s ability to save. But those who have built up a deposit might feel more confident taking their first step on the ladder now.
“Even though house prices have dropped over the short-term, they have still risen dramatically in recent years, meaning many people using a Lifetime ISA for their first home face being priced out of the product. The property limit for the Lifetime ISA has remained stubbornly at £450,000 since its launch in April 2017. When the Lifetime ISA was launched the average UK house price was £208,000, but it has since shot up to just over £259,000*. On average, house prices across the UK have risen by 25% since April 2017, and if the Lifetime ISA limit had increased in line with this it would sit at £562,500 today – more than £112,500 higher.
“Many aspiring homebuyers will have signed up to the accounts years ago, not realising that it would take so long to get on the property ladder and that they might fall foul of the property limit in the future. What makes the situation more galling for first-time buyers who have been priced out of using the Lifetime ISA is that they now face losing some of their own money when they withdraw their cash from the accounts, thanks to the onerous withdrawal penalty. Anyone who exceeds the £450,000 limit, even by just £1, will be hit with the 25% exit charge on the Lifetime ISA, as their purchase will no longer be within the rules.
“If someone had contributed the full £4,000 annual limit since the Lifetime ISA launched, they’d have a £35,000 deposit saved once the government bonus has been added**. If they then faced that 25% exit penalty, they’d have to pay an exit charge of £8,750. It means they’d end up with £26,250 in savings, £2,250 less than they contributed. If a couple buying together had both maxed out their Lifetime ISAs, they would face an exit penalty of £17,500 and would lose £4,500 of the money they saved for their deposit. On top of that many buyers will face a last-minute scramble to make up that shortfall.
“Ending this unfair penalty would be a simple fix for the chancellor, with the government rumoured to be looking at a range of measures to support first time buyers. Before they even begin to address new incentives for aspiring homeowners, government should prioritise fixing this obvious flaw in the current system.
“The original £450,000 property limit was set so that the government bonus could be claimed by genuine first-time buyers, rather than wealthier individuals going on to buy a million-pound house. It also broadly tallied with the stamp duty support on offer for first time buyers, whereby those buying a property worth up to £500,000 got a tax break. However, the government has since increased the stamp duty limit for first-time buyers up to £625,000, leaving a stark gap between that and the Lifetime ISA limit.
“A move to increase the property threshold wouldn’t cost the government huge sums and would allow many more first-time buyers to benefit from the Lifetime ISA bonus boosting their deposit savings. If Rishi Sunak and Jeremy Hunt are looking for ways to win votes that won’t cost the earth, this is one.”
*Based on latest figures from the Nationwide House Price Index.
**Figure assumes £4,000 annual contribution plus £1,000 a year government bonus for seven tax year periods, with no investment growth or interest.
