Martin Lewis in new warning risks for homeowners with properties over £450,000

Martin Lewis has issued a warning to homeowners and those looking to buy their first property about a little-known rule which could see you hit with a hefty penalty

Martin Lewis, the renowned money-saving expert, has sent out an urgent message to homeowners and prospective first-time buyers about potential significant fines. On BBC Radio 5 Live, Martin shed light on the outdated structures of ISAs and LISAs which are not keeping pace with the current housing market.

The Lifetime ISA (LISA) was introduced in 2017 to support people aged between 18 to 39 in purchasing their first home with a solid 25% bonus on savings. However, recent shifts in the property market could mean the scheme's conditions no longer fit the bill.

Martin pointed out the specific criteria for fund withdrawal: "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."

He went on to warn of the heavy penalties for using funds for any unapproved purposes: "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."

Martin explained that saving £10,000 would typically result in a £2,500 bonus, bringing the total to £12,500. However, if a 25% penalty is applied for unqualified withdrawal reasons, this sum would be reduced to £9,375, meaning a loss of £625 from the initial investment.

In the tax year of 2024, he highlighted that an astonishing £15 million in penalties was imposed on taxpayers. He stated: "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."

He went on to say: "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."

Addressing the predicament of savers, particularly in places like London and the southeast, he observed: "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 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."

From his analysis of fines, Martin estimated that approximately £1.8 million a year are unfairly paid in penalties by those using the LISA exactly as intended.Campaigners are calling for amendments to the government scheme aimed at assisting first-time buyers, which currently penalises individuals if they use it to purchase a property valued over £450,000. This issue was previously highlighted by Mr Lewis.

One concerned individual voiced their worries about the London housing market, stating: "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."

Another person commented: "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 it's intended purpose."

A third added: "Probably would have done had I not been as old as I am -59. But it does need some fixing re the cap."

Mr Lewis, the founder of MoneySavingExpert.com, is among those advocating for an urgent overhaul of the rules governing lifetime ISAs, which allow people to save for their first home or retirement. He has previously criticised the scheme as being "broken" in its current state, arguing that it unjustly deducts money from some young savers, leaving them with less than their initial investment.

Story SavedYou can find this story in  My Bookmarks.Or by navigating to the user icon in the top right.