Beware the traps of the ‘housing buying’ Isa
Lifetime Isas promise a foot on to the property ladder but there’s a big catch, finds Alexa Phillips
First-time buyers in London and the South East are being shut out of a Govewrnment scheme designed to help them save for a first home.
Lifetime Isas, or “Lisas”, were launched in 2017 and can only be used at the age of 60 – or to fund a first property.
Anyone aged 18 to 39 can put up to £4,000 a year into a Lisa and receive a 25pc bonus of up to £1,000 from the Government.
But a cap on the value of the property you can buy has never been increased from £450,000. House prices have soared across Britain by 35pc since, meaning more and more properties are off-limits to buyers using a Lisa.
To make matters worse, savers who want to withdraw their savings will be forced to pay an exit fee that would leave them worse off than when they began saving.
Buyers in London are the least likely to be able to use a Lisa to get on the property ladder.
More than two thirds (70pc) of homes in inner London sold for more than £450,000 last year, up from 66pc in 2017, according to the analyst Twentyci.
In outer London, more than half (55pc) of homes were sold above the cap, an increase from 40pc in 2017.
Other areas with a large proportion of homes selling for more than £450,000 were the South East (36pc), South West (25pc), and east of England (30pc).
The postcode area where most homes were inaccessible to firsttime buyers with a Lisa was, unsurprisingly EC, the City of London, where 91pc of homes cost more than £450,000. This was followed by western central London (WC), west London (W) and southwest London (SW), where more than 80pc of homes fell outside the limit.
Outside of London, St Albans in Hertfordshire was the least affordable area for savers, with 64pc of homes at more than £450,000, compared with 54pc in 2017.
Property values have soared in Slough, Berkshire, where 57pc are above the cap, an increase from 49pc in 2017. The average agreed sales price in December 2022 was £569,408.
Other affected areas included Guildford in West Surrey (53pc), Watford in Hertfordshire (58pc), the Hemel Hempstead area in Hertfordshire and Buckinghamshire (48pc), and Redhill in Surrey (46pc).
Tom Clougherty, of the Centre for Policy Studies think tank, which claims credit for the concept of a house buying Isa, said the Lisa is “increasingly unfit for purpose” and called for the purchase limit to be increased to £600,000, which is what it would be if it had risen in line with house price inflation since 2017.
He said: “Lifting the cap in line with changes in the property market would have a negligible impact on the Treasury
‘Lifting the cap in line with the property market would make a major difference’
but make a major difference to first-time buyers who have saved in good faith with a Lisa.”
James Vitali, of the Policy Exchange think tank, said increasing the Lisa threshold would be a “sensible stopgap measure”, but said the subsidy risked inflating house prices
TAKE YOUR MONEY OUT – LOSE 6.25PC
Savers face punitive charges if they have saved money in a Lisa and want to withdraw their savings to buy a home outside the scheme.
They have to pay 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.
Last year, Michael Johnson, the expert who came up with Lisas said that savers should be allowed to raid them without incurring a steep penalty charge.
This penalty was temporarily lowered to 20pc in March 2020 to help savers during the pandemic, but this was reversed in April 2021 when lockdown restrictions began to lift.
Mr Johnson said the penalty should be reduced again given the cost of living crisis.
Sarah Coles, of Hargreaves Lansdown, said it is “ludicrous” that people should be penalised for “being hit by forces out of their control”.
She also said the Government could also introduce regional variations if it did not want to raise the limit everywhere.
The Government has not responded to calls for the price cap to be reviewed. However, small business minister Kevin Hollinrake previously called for it to be indexed to property values that reflect the current market rather than the one in 2017.
He had also said the Government should take back its 25pc bonus if people choose to withdraw their money but not charge a 25pc penalty on the entire sum in the account.
Savers who have a Lifetime Isa that is no longer fit for their first home could use it to fund their retirement instead, but this comes with potential downsides too. The funds can only be accessed after the age of 60 and are tax-free.
But paying into a Lisa is less lucrative than paying into a pension (see box, left).
The Treasury declined to comment.