There are various potential reforms to Lifetime ISAs (LISAs) that could help first-time buyers onto the housing ladder, according to Laura Suter (pictured), head of personal finance at AJ Bell.
Suter said that if the LISA property limit – currently £450,000 – had risen with house price inflation of approximately 25%, even accounting for a recent cooling, the limit would now be £562,500.
She added that this would combine with other current market conditions in order to encourage first-time buyers.
“Despite a surprise jump this week the overall trend for house prices has been down over the past nine months,” Suter said.
“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.”
However, she warned that these hopeful buyers were put at a disadvantage by the property limits.
Suter said: “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 penalty for breaching the property limit, for someone who had saved the maximum amount since the product’s launch in 2017, would mean the loss of £2,250.
The 25% exit charge comes into effect if the purchase is even £1 over the £450,000 limit.
Suter said: “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.
“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.
Suter suggested that the property limit be aligned with the first-time buyer Stamp Duty break at £625,000, and that that Government should cut the withdrawal charge down to 20%.
“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,” Suter said.
“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.”
