The Government is considering increasing the property value cap on the Lifetime Isa (Lisa) to support more aspiring first-time buyers, according to reports.
The changes could be announced by Chancellor Jeremy Hunt in the Autumn Statement later this month.
A Lisa is a popular type of savings account designed to fund a first property purchase or retirement. The Government tops up the funds by £1 for every £4 saved, up to £4,000 per year.
At present, the value of a property being purchased using money saved in a Lisa must not exceed £450,000.
Boost: Savers under the age of 40 can open a Lifetime Isa and get a 25% Government bonus, which could help them to buy their first home
The same limit applies whether the buyer is an individual or part of a couple.
While this is generous enough for many, those buying in more expensive parts of the country, such as London and the South East of England, are much more likely to fall foul of the cap.
Another argument for raising the cap is that the cost of an average home has risen by around 25 per cent since the Lisa was put in place in 2017, but the purchase price limit has stayed the same.
There is also a limit on how much savers can put into a Lisa each year. Currently it’s £4,000 – which some argue is inadequate given current house prices.
Brian Byrnes, head of personal finance at saving and investing app Moneybox, says: ‘Aspiring first-time buyers the length and breadth of the country are likely holding their breath in anticipation of the Autumn Statement after recent reports that help may be on the way.
‘There can be no doubt that support is needed, as it has become increasingly difficult to get on the property ladder recently.’
In this year alone, Moneybox, which is currently the biggest Lisa provider, has seen a 43 per cent increase in the number of young savers opening a Lisa.
The reason it is so popular is because of the Government’s annual £1,000 bonus on the maximum £4,000 a year that can be saved.
That money can only be used towards a deposit on a first home or be withdrawn from the age of 60 to help fund retirement. Anyone withdrawing the money to spend on something else will pay a penalty of 25 per cent.
It means people who have been saving into a Lisa for some time may feel their money is effectively trapped in the account until retirement, if house prices in their area have risen and are now more expensive than the cap.
Two people buying together can each use their Lisa savings as a deposit meaning that jointly up to £8,000 can be saved each year.
How much could the Lisa property price cap go up?
At present, most first time buyers won’t be impacted by the cap. However, saving a deposit usually takes years and if house prices continue rising, the current cap could become a real hindrance.
Nine in ten Lisa customers bought their first home for less than £404,000, according to MoneyBox’s data.
In fact, it says that less than 1 per cent of Lisa savers have been affected by the property price cap to date.
However, the longer the Lisa house price cap remains at its current level, the more people will exceed it.
The average house price in the UK is £291,000, according to the latest figures from the Land Registry, but some parts of the country are much more expensive.
The average property price in London, for example, is £536,000, while in Cambridge the average house price is £513,000 – both above the Lisa cap.
If the government does decide to lift the £450,000 cap, then the question is by how much.
The property limit for a Lisa would be £562,500 if it had risen with house price inflation since it was launched in April 2017, according to investment platform AJ Bell.
However, it suggests that the Lisa property limit could be aligned with the first-time buyer stamp duty break at £625,000.
Laura Suter, head of personal finance at AJ Bell says: ‘Even though house prices have dropped over the short-term, they have still risen dramatically in recent years – meaning many people using a Lisa for their first home face being priced out of the product.
‘The property limit for the Lisa has remained stubbornly at £450,000 since its launch in April 2017. On average, house prices across the UK have risen by 25 per cent since then, and if the Lisa limit had increased in line with this it would sit at £562,500 today – more than £112,500 higher.
‘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.’
No change: The limits on Lisa contributions of £4,000 a year have not been increased since the scheme was introduced in April 2017
Brian Byrnes of Moneybox adds: ‘Thinking about the next generation of aspiring homebuyers who are just starting on what is a 5-8 year deposit-saving journey, we believe the price cap should be index-linked to house prices and subject to an annual review.
‘This will provide some much-needed reassurance and peace of mind to Lisa savers who live and work in some of the most expensive parts of the UK, and ensure the product remains fit for purpose for all those who need it most into the future.’
What about raising the Lisa contribution limit?
The £4,000 per year limit on Lisa contributions has also not been increased since the scheme was introduced in April 2017.
If someone had contributed the full £4,000 annual limit in each of the seven years since the Lisa launched, they would have a £35,000 deposit saved once the Government bonus had been added.
According to Zoopla, the average first-time buyer deposit in the UK is £34,500. However, in some regions it is much higher than that, such as London (£144,500), the South East and East of England (both £72,000), and the South West (£52,800).
Upping the annual cap could enable aspiring homeowners to squirrel away more and realise their home ownership ambitions more quickly.
As well as boosting the annual allowance, the Government should also cut the withdrawal charge to 20 per cent, according to AJ Bell.
At present, the withdrawal charge can leave people worse off if they cash in their Lisa without buying a first home.
This is because a 25 per cent penalty applies to the amount withdrawn if it is taken out before the age of 60, meaning they could end up with less than they put in.
Laura Suter adds: ‘If someone with the maximum £35,000 saved faced that 25 per cent 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 Lisas, 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.’
How the Lisa works
How Lisa is used for a house deposit
When a Lisa holder buys a property it is important that they do not simply withdraw the funds, as that will incur penalty charges.
Instead, they need to apply to their Lifetime Isa provider for the money to be sent to the solicitor handling the purchase.
The money can be used towards the deposit when they exchange contracts, although there cannot be longer than a 90 day delay between this and completion.
If the sale falls through, the solicitor will be able to put the money and bonus back into the Lifetime Isa – though it must be the same amount.
How the Lifetime Isa penalty works
The thing to watch out for on the Lifetime Isa is that money that doesn’t qualify as a deposit for a first home is heavily penalised if it is withdrawn before the age of 60.
If you paid in £1,000 and received the £250 Government bonus, you would have accumulated £1,250, assuming no investment growth.
But if you then withdrew the money without using it for a suitable home deposit, the 25 per cent penalty would apply to the £1,250, leaving you with £937.50 – and £62.50 out of pocket.
Should you save or invest with a Lifetime Isa?
There are two options for Lifetime Isas: cash, and stocks and shares. General investment advice has always been that investing is best if you don’t plan to use the money for at least five years. For anyone with a shorter timeframe, cash will be deemed the safe option.
However, given rock bottom savings rates, soaring inflation and the buffer of the 25 per cent Government top-up, there may be an extra temptation for Lifetime Isa holders to invest – albeit within reason.
After all, given the Lifetime Isa bonus, your investments would have to fall by more than 25 per cent for you to be down on what you have paid in.