Lifetime ISA trap: average London first-time buyer now over the £450,000 cap

The average London first-time buyer paid £466,851 in July 2026, above the Lifetime ISA’s (LISA) £450,000 limit, meaning someone buying at that price and withdrawing their entire LISA would face a 25% charge, Newspage research has found.

Savers paid a record £118.9 million in withdrawal charges in 2025/26, equivalent to approximately £326,000 a day.

More than 154,000 people incurred a withdrawal charge in 2025/26, compared with almost 130,000 in 2024/25. That exceeded the 99,750 people who used a LISA for a qualifying first-home purchase in 2025/26.

Advisers told Newspage that clients are losing money because their home exceeded the limit or their account had not been funded for long enough.

The figures come ahead of Wednesday’s Budget, with the Treasury considering responses to its proposed First Time Buyer ISA, intended to replace the LISA for new accounts.

What is the Lifetime ISA £450,000 cap?

The cap is the maximum price of a home that qualifies for a charge-free LISA withdrawal, alongside other conditions including a mortgage and at least 12 months since the first contribution.

Graham Nicoll, Financial Planner, Chartered FCSI at NCL Wealth Partners, argues that the £450,000 purchase limit undermines the scheme’s purpose in expensive areas.

He commented: "The Government should be helping first-time buyers onto the property ladder, not pulling it away from under their feet with an arbitrary £450,000 cap and punitive 25% withdrawal charge. Scrap the cap. Why penalise buyers because of where they live or what they earn? If the money buys their first home, the penalty should not apply!

“My son is a great example of why LISAs work. The government bonus has given him a laser focus on maximising contributions, encouraging him to save more himself. He hopes to buy his first home next year. That's exactly what the scheme should achieve.

"I’d caution anyone potentially buying above the cap against further contributions and instead use a normal ISA or general investment account. It's too early to judge the proposed First Time Buyer ISA, but it mustn't repeat the same mistake."

How much does the 25% withdrawal charge actually cost?

A saver contributing £16,000 and receiving £4,000 in bonuses would have a £20,000 pot before growth, but withdrawing it for a purchase above the cap would incur a £5,000 charge, leaving £15,000 – £1,000 less than they contributed.

Matt Coulson, Founder at Rickmansworth-based Heron Financial, says the 25% withdrawal charge goes beyond recovering the bonus.

He commented: "This is a scheme punishing the very people it was built to help. The £450,000 cap has stood still while London prices climbed past it, so the average first-time buyer in the capital is now over the line through no fault of their own. The penalty makes it worse. The 25% charge hits the whole pot, so you lose the government bonus and a chunk of your own savings on top. 

"Run the numbers and you can end up with less than you paid in, for a home a few thousand over an arbitrary limit. So two things. The cap should at least track house prices, and like any sensible housing measure it should flex regionally, because a single national number never fits a country with these price gaps. 

"And the charge should never claw back a saver’s own money. Clawing back the bonus is one thing, taking their contributions is another. What to do with an existing Lifetime ISA is one for a qualified adviser, not a headline. If a First Time Buyer ISA replaces it, build those fixes in from day one."

Are buyers already paying the penalty?

Advisers report clients paying charges because their purchase exceeds the cap or their account does not meet the minimum holding period.

Michelle Lawson, Director at Fareham-based Lawson Financial, said two of her clients have been affected.

She commented: "I have a couple of customers who have had to pay their penalties. One because they are buying above the £450k and the other because the account hadn't been held long enough by 1 month. 

"There should be no cap – if this is an incentive to help people buy, let them buy without ripping them off or punishing them. Ultimately, sometimes people can't control when they buy but most will just carry on regardless as sometimes, the saving on the property can be worth it to them overall.”

Should the cap rise or be scrapped?

Advisers want reform, with proposals including removing the cap, introducing regional limits or raising it with regular reviews.

Nouran Moustafa, Practice Principal & IFA at Roxton Wealth, proposes a minimum £609,000 limit and says savers expecting to exceed the current threshold should review future contributions.

She commented: “We've managed to create a first-time buyer savings scheme that can actually punish people for buying their first home. How ridiculous is that? Imagine doing everything the government encourages. You work, save consistently and finally find a property. But because it costs £451,000 instead of £450,000, you could lose £1,000 of your own savings on a £20,000 Lifetime ISA pot. That's not rewarding financial responsibility. 

"That's penalising it. I'd raise the property limit to at least £609,000, with regular reviews, and abolish the penalty on people's own contributions when buying above the cap. For savers likely to exceed £450,000, I'd review whether further LISA contributions make sense. The proposed First Time Buyer ISA must not repeat the same mistake. 

"Losing a government bonus is one thing. Losing money you've worked hard to earn and save is another. We should be helping people onto the property ladder, not charging them for climbing higher than an arbitrary Treasury threshold.”

Will the Budget change the Lifetime ISA?

The Treasury has proposed a First Time Buyer ISA to replace the LISA for new accounts.

Tracey Dixon, Buy-to-Let Mortgage Specialist & Owner at Cardiff-based Pure Mortgage and Protection, says any replacement must work for buyers when they need their savings.

She commented: “First-time buyers can spend years building a deposit, only to discover the scheme’s rules have stopped keeping pace with the homes they need. The principle should be simple: buying your first home should not mean losing part of the money you saved yourself. For an otherwise qualifying purchase above the cap, I would support removing the withdrawal penalty on the saver’s own contributions, even if the government bonus must be returned.

"I’d favour a higher purchase cap with scheduled reviews against house prices. A one-off increase simply risks creating the same problem again later. A replacement First Time Buyer ISA should be judged on whether people can actually use it when they are ready to buy. A generous headline bonus means little if the rules leave the home out of reach. We should reward the discipline of saving for a deposit, rather than punish buyers for house-price growth they cannot control.”