Lifetime ISA property limit should have risen by £100,000, as house price inflation hits pre-crash levels

•    Halifax House Price Index shows house price inflation at highest since 2006
•    Soaring house prices mean the £450,000 property limit for Lifetime ISA savings should increase
•    House prices have risen 23% since the Lifetime ISA launched
•    If the property limit had risen by the same amount it would be £553,725 today
•    Lifetime ISA savers face up to £6,250 penalty for going over the limit

Laura Suter, head of personal finance at AJ Bell, comments: 

“Today’s Halifax house price index shows that we’re now seeing the highest house price rises since before the financial crash, with the average UK house price rising to another new record. The figures show that on a quarterly basis, the house price growth of 3.4% over the past three months is the highest since the end of 2006, with property prices rising an average of almost £1,700 a month since the pandemic began in March 2020.

“As property prices have soared and the market shows no signs of a slump since the stamp duty holiday ended, those using a Lifetime ISA to buy their first home face being priced out of the market by the £450,000 limit on the property value. 

“When the Lifetime ISA launched in April 2017 the average UK house price was £219,000, but it has since shot up to £270,000*. Despite that, the limit for those using the Lifetime ISA to help fund their deposit has remained stubbornly at £450,000. On average, house prices across the UK have risen by 23% since April 2017, and if the Lifetime ISA limit had increased in line with this it would sit at £553,725 today – more than £100,000 higher.

“Those buying in London and the south-east are most likely to hit the upper Lifetime ISA limit, as property prices are more expensive in these regions. The average house price in London now stands at £507,000, almost £60,000 more than the limit.  

“Even if the property limit was pegged to inflation, it would have increased by 10%**, meaning it would have risen to £495,000. If the Government deemed £450,000 to be a reasonable level to set the limit at more than four years ago, in order to target the Lifetime ISA incentive at the correct group of people, then it should surely believe that this limit should increase with rising prices.

“The fact that the limit hasn’t risen since Lifetime ISAs were launched more than four years ago might come as a nasty shock for some homebuyers who hadn’t banked on such soaring house prices when they first started saving into the Lifetime ISA years ago. 

“The last thing buyers need is the unexpected surprise of the exit charge if they exceed the £450,000 limit when they come to buy. Anyone who exceeds the £450,000 limit 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 £25,000 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 £6,250 – and face a last-minute scramble to make up that shortfall.

“While £450,000 is a high house price and would seem unattainable for many people, more and more first-time buyers are buying properties above this limit. Last year 11% of first-time buyers bought a home worth £400,000 or more, compared to 8% in 2017, while 5% of first-time buyers bought a property worth £500,000 and above last year, compared to 4% in 2017.

“In a busy market any first-time buyer looking to buy a home near the £450,000 limit who comes up against other buyers loses their negotiation ability, because once the price exceeds £450,000 they are effectively priced out of the market. Even if the price rises to £450,500 they face the choice of bowing out of the negations or that £500 increase costing them thousands in the Lifetime ISA penalty.”

*Based on figures from the UK House Price Index
** Based on average CPI inflation since April 2017
***Figure assumes £4,000 annual contribution plus £1,000 a year Government bonus, for five tax year periods, with no investment growth or interest.