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First Time Buyers- nasty penalties on LISA's - beware!

Journalist:

ended 28. August 2026

First-Time Buyers are actively encouraged to use many Government schemes to save for a property deposit. The current stinger is the LISA. When it was introduced in 2017, you could save up to £4000 per tax year, tax free alongside the standard cash ISA allowance. The gain is a 25% bonus per year and, if you put the maximum in you get a free £1000 ‘boost’ each year. The downside is that the maximum permitted purchase price is £450k without incurring penalties- this limit has remained frozen since 2017 even though house prices have risen by 25-30% over this time. You must also hold the account for a minimum of 12mths for a penalty free withdrawal.

You can buy a property over £450k but, one borrower will now receive back less than he put into the LISA as he forfeits his bonus as a 25% penalty on the whole balance- which goes directly to the HMRC coffers. 

On a joint income with a 10% deposit at £450k purchase price, each applicant would need to be earning approx £40k each which is becoming a more standard salary with recent Government legislative rising wages. This would be the ‘norm’ in the SouthEast for many.

Is this too out of date, if so:

  • what warnings can be given to first-time buyers?
  • what can first-time buyers do to mitigate this problem?
  • is this a common situation that you are seeing?
  • although it's in the t&c's, do people really read and understand them or are they flying blind and getting stung when it's too late?
  • any other comments welcome!

9 responses from the Newspage community

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Michelle LawsonVerified
Director at Lawson Financial
First Time Buyers (FTB's) are being encouraged on one hand to save however, to get the property that suits their needs and budget can come with consequences. The property market is already strangled so more should be done to encourage people to buy and get the market moving. I understand losing the bonus to a point, although when funds have been invested for a period of time, the save should be suitably rewarded. This would then mean other safer investments would have potentially been more beneficial. Some FTB's will have set these up assuming they will be buying on their own and then end up meeting someone changing their financial landscape and buying power.
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Stephen PerkinsVerified
Managing Director at Yellow Brick Mortgages
The £450,000 limit increasingly feels detached from the housing market it is supposed to help first-time buyers enter. The particularly nasty part is that the 25% withdrawal charge doesn't just take back the Government bonus; it can leave someone with less than they originally saved.

Buyers caught by the limit shouldn't automatically withdraw the LISA and accept the penalty. Depending on their circumstances, they may be able to fund the purchase another way and leave the LISA invested for later life. More importantly, people need to understand the £450,000 restriction when they first open one, particularly in higher-priced areas. The Government should review the limit and consider whether higher regional thresholds are now needed.
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Evren ErginVerified
Founder And Developer at ValuQ
We watch this from the buyer's side, and the LISA is the newest in a long line of quiet penalties: EWS1 cladding forms, shifting stamp duty thresholds, conveyancing stuck in a slower age, higher rates, and now a savings cap that fines you for buying in the wrong postcode. The market rarely takes one big blow. It takes a hundred small ones, all landing on the buyer.

On the LISA, the numbers speak. The £450,000 cap has not moved since 2017; with inflation it would be over £575,000, and across London and the South East it barely covers a first home. It is a cliff, not a taper. At £450,001 the penalty-free route closes. You do not lose your pot, but take it out for that purchase and the 25% charge claws back the Government bonus and 6.25% of your own savings with it. You are fined for saving.

So the fairer rule is the obvious one: buy above the cap and you should lose the bonus the state gave, never the money you put in.
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Toby QuanstromVerified
Director at Quanstrom Financial
The Lifetime ISA is the only Government scheme that punishes people for using it - but savers are still being stung while patiently waiting for a fix. The £450,000 cap has not changed since 2017 while house prices have climbed by more than a quarter, so in much of the South East an ordinary first home now exceeds it. Cross the cap by a pound and the 25% penalty does not just claw back the bonus, it takes 6.25% of your own money: pay in £4,000, get the £1,000 boost, and a penalty withdrawal returns £3,750.

That is a fine for doing exactly what the scheme told you to do, and almost nobody spots the in the small print. We now warn every LISA saver to check the cap against local prices early, before they fall in love with a home. A consultation to replace the LISA with a penalty-free version is underway, but not until around 2028. The bridge is obvious: unfreeze the cap and scrap the penalty on savers' own money now, not in two years.
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Nouran MoustafaVerified
Practice Principal & IFA at Roxton Wealth
The LISA was designed to help first-time buyers, but in parts of the country the £450,000 cap is now starting to punish the very people who used it properly.

The nastiest part is the 25% withdrawal charge. People hear “you lose the Government bonus”. You actually lose more than that. Put in £4,000, receive the £1,000 bonus and withdraw the £5,000 incorrectly: the charge is £1,250, leaving you with £3,750. You have lost £250 of your own money.

That is outrageous when the buyer has not raided the account for a holiday or a car; they have simply found a first home costing £451,000.

My advice is to check realistic purchase prices before aggressively funding a LISA, especially in London and the South East. The £450,000 ceiling has stood still while house prices have not.

A first time buyer scheme should not become a tax penalty because someone’s local housing market moved faster than Government policy.
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Harvey DhillonVerified
Founder & CEO at Zmartly
The cap is out of date, and the warning I'd start with is timing, not the price cap. The Lifetime ISA's 12-month wait for a first home runs from your first payment in, so an empty account hasn't started the clock. The cap tests the purchase price, not the size of your withdrawal, so on a home over £450,000 taking less out doesn't avoid the charge. There's no hardship exception. But nothing forces you to withdraw, and the balance comes out charge-free at 60. How common this is isn't something I see from my desk. Whatever the reason for early withdrawal, the Treasury's consultation says more LISA holders have lost part of their original savings than have used the account to buy a house. You can read the terms and still be flying blind, because the charge doesn't bite until you withdraw, which is when it's too late. HMRC's own research found awareness of withdrawal conditions relatively low among those interviewed, so blaming savers for not reading the small print doesn't hold.
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David StirlingVerified
Independent Financial Adviser at Mint Wealth
As a financial adviser, this is the conversation I have regularly with first-time buyers: the LISA's a brilliant deal until your dream home costs a penny over the £450k cap, which hasn't moved since 2017 while property prices have. Cross it and you don't just lose the bonus, you lose 25% of the whole pot, savings included, so you hand back more than the government ever gave you. It's hard to call this a helping hand when the small print is quietly helping itself to your deposit. You have to wonder whether anyone in the Treasury has checked a Rightmove listing since 2017.
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Tracey DixonVerified
Buy-to-Let Mortgage Specialist & Owner at Pure Mortgage and Protection
One of the problems with the LISA is that a first-time buyer’s circumstances can change significantly during the years they are saving. Their income may increase, they may buy with a partner, or their borrowing capacity may improve, meaning the type of property they are looking at could eventually exceed the £450,000 limit.
The danger is that buyers focus on building their deposit without revisiting whether the LISA rules still fit their likely purchase.
My advice is to review your position before you start seriously house hunting. Understand how much you could potentially borrow, what properties cost in the area you want to live and whether that could take you above the LISA ceiling.
A savings scheme designed to help first-time buyers should not end up penalising them simply because their circumstances and buying power have improved.
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Antonia MedlicottVerified
Founder & MD at Investing Insiders
First-time buyers must be made aware of the pitfalls of Lifetime ISAs before opening an account. Providers should clearly state that Lifetime ISA savings cannot be used to purchase properties over £450,000 without the saver facing a 25% withdrawal penalty.

The £450,000 limit has remained unchanged despite significant increases in house prices, leaving many first-time buyers struggling to find suitable homes within that threshold.

The penalty is particularly concerning, as a 25% charge can result in savers losing not only the government bonus but also some of their own money. This should be made far clearer to anyone opening a Lifetime ISA. Too often, buyers are caught off guard by this restriction, while the penalties can be buried in terms that are easily overlooked.

Without adequate warnings, first-time buyers risk losing savings they have diligently built up. While Lifetime ISAs offer benefits, the rules are too restrictive for it to be fit for purpose in today's property market.