How first-time buyers could be frozen out of government savings scheme

• First-time buyers in 54 regions could be frozen out of using a Lifetime ISA to buy a typical terraced house in their area, analysis by AJ Bell shows
• Lifetime ISA first-time buyer limit capped at £450,000 in 2017 is set to remain unchanged more than a decade later
• AJ Bell calls on chancellor to review Lifetime ISA rules to support first-time buyers and end unfair early exit penalties
• Measures should form part of a wider strategy to boost uptake of ISAs, with Labour's plan for financial services setting out aims to drive more stocks and shares accounts

First-time buyers hoping to use a government-backed Lifetime ISA to buy their first home could be squeezed out of buying a terraced house in more than 50 regions of the UK, new analysis from AJ Bell shows.

The government pays up to £1,000 a year into each Lifetime ISA account, which can then be used to secure a mortgage on a first home. But the property cannot cost more than £450,000, with the limit remaining unchanged since 2017.

Unless the government acts to increase the limit, aspiring homeowners could be frozen out of using a Lifetime ISA to buy a terraced house in 54 regions by the end of this parliament. 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.

The analysis, conducted by AJ Bell based on Land Registry data and OBR forecast house price increases, illustrates the dilemma faced by those saving for their first home in many parts of the country. Savers unable to use their Lifetime ISA to buy a property face the prospect of incurring a punitive early withdrawal charge if they close the account.

AJ Bell is calling on the government to review Lifetime ISA rules and increase the purchase price limit, bringing it in line with house price growth since 2017 to support buyers onto the property ladder. The business has long campaigned for improvements to the ISA system, including simplification to make it easier for people to invest.

Dan Coatsworth, AJ Bell investment analyst, says:

"Aspiring homeowners could be frozen out of using a Lifetime ISA unless this flaw in the system is fixed.

"While in many parts of the country a typical first home will cost far less than £450,000, large parts of London are already well over the threshold for a terraced house or a flat. Lifetime ISAs may not be designed to help people buy homes in Kensington or Fulham, but Watford and Welwyn surely shouldn't be off limits.

"Areas including Merton, Ealing and Barnet threaten to become too expensive for first-time buyers hoping to use the government-backed savings vehicle to even buy a flat. For aspiring young people planning to build a career in the capital, it sends out the wrong message if normal commuter areas are effectively frozen out of the government's flagship first-time buyer savings product.

"A couple with a young child might dream of having a two-bedroom terraced house with a small garden. If one or both of them have jobs in London, they face the prospect of either buying a smaller place, tolerating a much longer commute to buy somewhere using their Lifetime ISA savings, or sacrificing the bonus altogether.

"Across large swathes of the country first-time buyers looking to buy a home will be excluded from the scheme. While smaller properties should fall under the threshold in most areas, a young family or a couple who rent but want to move to a semi-detached house with room to grow their family will find they're excluded from using the government's first-time buyer savings plan in large parts of the UK.

"Tweaking the maximum property value limit for using the account by a small amount each year would make a massive difference to so many individuals.

"The property valuation cap hasn't changed since the Lifetime ISA launched seven years ago, even though property prices have subsequently moved higher across parts of the UK. It means account holders wanting to use the money are often left with a dilemma - buy a cheaper property than you really want, or close the account and face an early exit penalty.

"While the savings can be held until age 60 and used for retirement, most first-time buyers will need to use the money in the account for their deposit, even if it means they're forced to cash in their Lifetime ISA early and swallow the penalty.

"Government should not be penalising people in that situation and AJ Bell has long campaigned for the exit penalty to revert to 20%, taking away the additional punitive charge currently applied to those who find their plans change or they can't use their Lifetime ISA as intended.

"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."

Early exit penalties

"Almost 100,000 Lifetime ISA holders had to withdraw money earlier than planned in the 2023/24 tax year, picking up a penalty for doing so.

"The 25% early withdrawal charge, which effectively acts as a 6.25% exit penalty, is deeply unfair and punishes those for whom a change of circumstances means they can't pursue their homeownership aspirations. Reducing this to 20%, so it simply aims to return the upfront government bonus, would be a straightforward, low-cost reform that benefits younger people hoping to get on the property ladder.

"Government implemented a temporary reduction in the charge during the pandemic to avoid penalising anyone forced to take their money early when the economy ground to a halt. It should make that measure permanent to avoid putting people off using a Lifetime ISA."

Source: AJ Bell/HMRC

Regions where first-time buyers may not be able to use a Lifetime ISA

AJ Bell calculates an additional 18 regions of the UK would be out of reach for first-time buyers hoping to buy a typical terraced home in five years' time at the end of this parliament if no action is taken. That's in addition to the 36 areas where the average terrace already costs more than £450,000.

AJ Bell calculates flats in another six areas of the UK, including Brent and Southwark, could exceed the £450,000 maximum property value in five years' time. That's on top of the 11 regions where the average flat already costs more than that threshold.

This analysis is based on the average price of a terraced house or flat in August 2024 calculated by HM Land Registry and uprating the value each year using annual house price growth forecasts from the OBR*.

Flats:

*HM Land Registry, UK House price index, August 2024; OBR report, house price change forecast, October 2024.