Martin Lewis highlights risks for homeowners with outdated £450,000 property rule in LISA scheme

Martin Lewis, the money-saving expert, has fired off a stark warning for homeowners and aspiring first-time buyers about potential hefty fines. On BBC Radio 5 Live, he shed light on the shortcomings of ISAs and LISAs, which are struggling to keep pace with shifting market conditions.

He explained the purpose of the Lifetime ISA (LISA), introduced in 2017 to help 18 to 39-year-olds save for their first home, saying: "You can take the money out only for one of two reasons: number one, you are buying a first-time property, you've never bought a property before, you've never owned a property before and that property has to be worth under £450,000. The second reason is you've hit age 60 and then you can take the money out and you get to keep the bonus."

But Martin flagged up a worrying catch regarding withdrawals, pointing out: "No one who has opened the ISA has hit age 60 yet because they haven't been around long enough. It's a savings account. It's just a tax-free savings account, but the real key to it is the 25% state bonus. The problem with a lifetime ISA...the big one is if you take your money out for any other reason than to buy a first-time qualifying property or at retirement effectively when you're age 60, you take a 25% penalty."

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Martin Lewis has broken down the potential pitfalls of saving in a Lifetime ISA (LISA), using an example of a £10,000 investment. He explained that while this would typically attract a £2,500 bonus, bringing the total to £12,500, a 25% penalty for unqualified withdrawals could see the amount drop to £9,375 - a loss of £625 from the original sum, according to the Manchester Evening News.

In the tax year of 2024, he highlighted that a whopping £15 million in penalties was handed out to taxpayers. He commented: "Now I don't have that much of a problem with that because that's to ensure that people are only using the LISA for the reasons intended.", reports the Express.

However, he expressed concern over the unchanged property threshold limit since the LISA's launch in 2016. He said: "This is my problem, the LISA was launched in 2016. The property threshold limit in 2016 was £450,000 the property limit is still £450,000."

He pointed out the difficulties faced by savers, particularly in areas like London and the southeast, where rising house prices have left many unable to buy their first home without facing a significant penalty. He stated: "Many people, particularly in London, the southeast and other urban metropolitan areas, have been priced out due to rising house prices. They've saved as the government advised for their first property, but now their property is valued at over £450,000. To withdraw the money, even to purchase a first-time property which is the purpose of this product, they face a significant penalty."

Based on his analysis, Martin estimated that around £1.8 million a year are unfairly paid in penalties by those using the LISA exactly as it was intended.

Campaigners are pushing for a shake-up of the government's scheme aimed at helping first-time buyers, which penalises those purchasing homes over £450,000. Martin Lewis previously highlighted the issue, with one concerned Londoner sharing: "I live in London and only apartments are affordable at the £450K cap. A decent apartment (e.g. energy-efficient, quiet neighbourhood) hovers around £450K. My concern is that when interest rates decrease (and prices increase), buying an apartment in London will be infeasible."

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Another individual lamented online: "House price in my area was capped at 250k, relatively useless. Seems like it's London and Everywhere else just like most things... Doesn't meet its intended purpose." Meanwhile, another commented: "Probably would have done had I not been as old as I am -59. But it does need some fixing re the cap."

Martin Lewis, who founded MoneySavingExpert.com, is among those demanding urgent changes to the lifetime ISA rules, which allow people to save for their first home or retirement. He has previously described the scheme as "broken", criticising it for unfairly taking money from young savers, leaving them with less than they put in.