Revealed: How Lifetime ISAs block some young people from buying their first home

Young people can get up to £1,000 free from the government each year towards buying their first home if they put their savings in a Lifetime Individual Savings Account (LISA or Lifetime ISA). For the majority of first-time buyers, it gives them a leg-up to their first step on the property ladder. Brilliant. But there’s a catch.

You have to use every pound you put in the LISA towards buying your first home or your retirement, or you risk losing both the government bonus and 6.25% of your own savings. The home also has to cost less than £450,000, a cap which has not changed since the scheme was introduced in 2017 despite soaring house prices.

For some people, particularly those based in London and other expensive parts of the country, the Lifetime ISA is blocking them from buying their first home.

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Sophie, a 28-year-old who grew up, lives and works in London, says: “When my partner and I opened our LISAs in 2021 it felt like such a massive boon as it would help us with our deposit. But now we’re flat hunting, it’s been feeling more and more like a millstone around our necks.

“It’s so competitive around the cap, we’ve been outbid on multiple properties by people who’ve been able to go just that tiny bit higher and push a cheaper property over the threshold. It doesn’t help that everyone is aware of the £450,000 limit.”

More than 1.5 million people are currently using a Lifetime ISA to save for their first home, according to figures from HMRC. People can put a maximum of £4,000 in each year, and the government will top it up by 25% on top of any interest offered by the account provider. Moneybox, the current market leader, saw a 38% increase in Lifetime ISA users last year.

Brian Byrnes, head of personal finance at Moneybox, says: “The Lifetime ISA is an absolutely fantastic product. It has helped nearly a quarter of a million people onto the property ladder. It is instilling incredible saving and investing habits into a new generation of people and, for a relatively small government outlay, it is giving people confidence and hope that getting a deposit together is still possible.”

But even LISA providers are campaigning for reform. Moneybox is calling on the government to future-proof the scheme by committing to an annual review of the price cap in line with house price inflation, as well as introducing a penalty-free ‘emergency withdrawal allowance’ so savers are not penalised if they need to take out the money in an emergency.

The current withdrawal charge means that people lose 25% of the total money in the account – including the savings, government’s bonus and any interest acquired.

“There should be some sort of mechanism that the house price cap can move over time. On average, people tend to save for between three and five years with the Lifetime ISA before they purchase a home. But that can go up to seven to 10 years,” Byrnes says.

In those years between a person opening a LISA and having enough money for a deposit, circumstances can change hugely. The average age of a first-time buyer is now around 32. People may have met a partner, have children, or be thinking about a family by the time they are ready to buy.

A one-bedroom flat may no longer cut it – but a larger property with a garden is, as Byrnes points out, “pretty tricky to achieve in London under the £450,000 cap”.

He adds: “I think it’s perfectly reasonable that you give up the government bonus if you’re not going to use the product for what was intended to. But we do not think it is fair and equitable that you also give up some of your own savings if your circumstances have changed.”

Holly, a 33-year-old based in the Midlands, has experienced life changes since setting up a Lifetime ISA. She set up her account in November 2020 and has been putting the maximum amount of money in it each year, but her plans have changed for buying her first home.

“I was looking for a house but I just didn’t find the right thing. I was looking into shared ownership or buying with a partner, but then we broke up. I looked for a bit but with one income, it’s a lot harder. Then I met my current partner a year ago, and he already had a house, so I haven’t needed to use the LISA for a first home.”

Holly still plans to use the money in her LISA to buy a new property with her partner when they are ready, but she has stopped putting as much money into the account each year.

“You can lose four or five years of interest if you take it out that account and don’t use it for what it’s intended for. I’d be quite annoyed if that happened,” Holly says.

Funmi Olufunwa, a qualified consumer finance lawyer and mortgage advisor and the founder of Hoops Finance, claims that “if you didn’t have the withdrawal charge, then the price cap would be less of an issue”. People could leave the money in the LISA until their retirement and use it as a pension, but “for a lot of people, that’s decades away”.

An increasing number of people are making unauthorised withdrawals and incurring the withdrawal charge, according to a Treasury Select Committee report published in June, which it warned “may indicate that the Lifetime ISA is not working as intended”. 

It found that “many people have lost a portion of their savings due to a lack of understanding of the withdrawal charge or because of unforeseen changes in their circumstances”.

There are also concerns, raised by the Treasury Select Committee, that the LISA impacts people’s eligibility for universal credit and other means-tested benefits – despite people being unable to access those savings without facing a penalty charge. It urged the government to treat it like other pensions products, or otherwise include warnings that the LISA is an “inferior product for anyone who might one day be in receipt of universal credit”. 

Peter, 31, explained that he had a LISA which he was using to save for retirement – but he paid the early withdrawal fee because he is facing a long-term period of unemployment and the savings account would have impacted him being able to claim benefits. Instead, he transferred the money to a self-invested personal pensions account which would not impact his eligibility for universal credit.

“There is a real issue with LISAs in that they are marketed as a pension alternative and are even regulated by the pensions regulator and yet when it comes to benefits claims they are treated like a normal savings account,” he says.

Meg Hillier, chair of the Treasury Select Committee, says: “We know that the government is looking at LISA reform imminently which means this is the perfect time to assess if this is the best way to help the people who need it.

“We are still awaiting further data that may shed some light on who exactly the product is helping. What we already know, though, is that the Lifetime ISA needs to be reformed before it can genuinely be described as a market-leading savings product for both prospective homebuyers and those who want to start saving for their retirement at a young age.”

Olufunwa, who gave evidence to the Treasury Select Committee, is calling on the government to review the price cap, either using the same methodology used to come up with the £450,000 cap, or by using house price inflation to determine today’s equivalent.

The average house price in England in 2017 was £243,582, according to official government statistics. In 2025, the average house price is now £286,000. That’s a 17.4% increase in property prices. If the cap of the Lifetime ISA had increased by the same amount as house price inflation, it would now be £528,300.

Moneybox claims that only 1% of people who open a Lifetime ISA are impacted by the cap, but that is still 13,000 current users who will be affected.

A Treasury spokesperson says: “Across the vast majority of the country and in most London boroughs, the average price for a first-time home remains below the £450,000 Lifetime ISA cap. We are also committed to building 1.5 million more homes so that people can turn the dream of owning a home into a reality.”

The Help to Buy ISA, the LISA predecessor which closed to new customers in 2022, did not have a withdrawal charge. But its cap was lower at £250,000 – except for in London where it was £450,000 – and people are still subject to the limits of that today.

People can transfer their money from a Help to Buy ISA into a Lifetime ISA, but as the maximum is £4,000 per year, it could take people years to transfer their savings.

“When the government is either looking at making a new policy or reviewing existing policy, it needs to do it with the backdrop of what is really going on,” Olufunwa says. “We know that people are getting on the property ladder later on. We know that they’re not moving as often, partly because of cost, because of things like stamp duty.

“It’s not as easy financially or emotionally. It takes a lot out of you, especially if you’ve got children. People aren’t moving every couple of years once you get to a certain stage in life. In my view it doesn’t fit in with how a lot of people live their lives.”

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