Andy Burnham's government has confirmed a cut to the tax-free ISA allowance from £20,000 to £12,000 for under-65s, a move critics say could hit first-time buyers. Experts have now warned that the new rules could also leave buyers falling into a financial trap when purchasing a property.
Under current rules, home buyers using a Lifetime ISA (LISA) to contribute to a home purchase do not have to pay a withdrawal charge on that amount. This means they can use all of their savings plus the maximum government contribution of £4,000 towards buying a property.
The £450,000 LISA cap explained
However, some experts are warning that the system has a flaw. The government only waives the 25% withdrawal charge on the LISA if the money is used on a property that costs less than £450,000. If a house costs more than that, buyers could end up out of pocket.
For example, if a LISA holder has saved £16,000 and received the maximum of £4,000, that total sum of £20,000 would be subject to the 25% withdrawal fee. The buyer would see £5,000 deducted, leaving them with £15,000 — a grand less than they originally saved.
Buyers could be left worse off
Buyers could be left worse off than if they hadn't tried to save money using a LISA in the first place. With the average house price in London already over £450,000, this trap is more than just a hypothetical.
Graham Nicoll, Financial Planner, Chartered FCSI at NCL Wealth Partners, called on the government to "scrap the cap", adding that buyers should not be "penalising buyers because of where they live or what they earn".
He said: "The Government should be helping first-time buyers onto the property ladder, not pulling it away from under their feet with an arbitrary £450,000 cap and punitive 25% withdrawal charge. If the money buys their first home, the penalty should not apply!"
Nicoll added: "My son is a great example of why LISAs work. The government bonus has given him a laser focus on maximising contributions, encouraging him to save more himself. He hopes to buy his first home next year. That's exactly what the scheme should achieve."
He cautioned: "I'd caution anyone potentially buying above the cap against further contributions and instead use a normal ISA or general investment account. It's too early to judge the proposed First Time Buyer ISA, but it mustn't repeat the same mistake."
