‘A dud scheme’: First-time homebuyers in lifetime Isas are being left with LESS money than they put in because of a single rule
- The LISA accounts were designed to help under-40s save for their first home
- 25% from the Government on top of savings convinced half a million to start one
- Savers risk being caught out by a rule limiting the cost of properties to £450k
A landmark government savings scheme to help first-time homebuyers boost their deposits is leaving them with less money than they put in.
The Lifetime ISA (LISA) scheme is embroiled in controversy because of a rule that can scupper young people’s home purchases.
Consumer campaigner Martin Lewis last night intervened – calling for Ministers to take action over what he called a ‘dud’ scheme.
The LISA accounts were designed to help under-40s save for their first home. A bonus of 25 per cent from the Government on top of anything saved convinced half a million to take one out.
The Lifetime ISA (LISA) scheme to help first-time homebuyers boost their deposits is leaving them with less money than they put in
But savers – who can put money away into their 40s so long as they open them when aged 18 to 39 – risk being caught out by a rule limiting the cost of properties to £450,000.
When that amount was set at the scheme’s launch in April 2017, it was high enough to ensure first-time buyers would easily find eligible homes. Since then, property prices have shot up 35 per cent.
By not increasing the cap it means typical first homes in London and other cities are out of reach, as they are too expensive.
Those savers that no longer qualify to use the LISA for a first home are then stuck. If they want to buy a property costing more than the £450,000 ceiling, to access their LISA money for their deposit they must pay a fine that leaves them with less money than they saved.
Consumer campaigner Martin Lewis last night intervened – calling for Ministers to take action over what he called a ‘dud’ scheme
Not only do they lose the 25 per cent bonus, but on top are hit with a penalty of 6.25 per cent. This can amount to £1,000-plus.
Martin Lewis, founder of Money Saving Expert (MSE), said: ‘This is about fairness to about half a million younger people the state sold a savings scheme to that for some of them is now a dud.
‘If a private firm had done this, it would be getting close to mis-selling. Savers had a legitimate expectation that – over six years, amid huge house price inflation – that under a fair system there would have been some uprating to the maximum house purchase limit.
‘Without it, a chunk face being priced out, having to spend more on a property, and then having to pay the state a fine to access the money they’d put aside for a deposit.’ Ideally he would like two rule changes from Ministers – to allow savers using LISA money to buy a non-qualifying home to withdraw it without penalty and to raise the £450,000 LISA limit to £607,500, and then index link the threshold to house prices thereafter. But he would accept either change.
Some 155,600 LISA savers withdrew money between April 2017 and April 2022 and were hit with the fine – forfeiting £9.5 million of their own cash, according to an MSE report. Jess Rostron, a 38-year-old architect from London, took out a LISA in 2017. But Jess ran into problems last June when she and her partner struggled to find a suitable home in the capital costing less than £450,000.
She said: ‘A £450,000 limit seemed like a reasonable cap in London when LISAs launched, but now it’s not.’
The couple are contemplating their options, including withdrawing Jess’s LISA funds, which would see Jess lose £4,700 from her current £18,800 pot, and with £940 less than she put in.