The body said the property price thresholds and withdrawal penalty were “contradictory to the scheme’s original intentions” and called on Jeremy Hunt to amend these in the upcoming Spring Budget.
Both ISAs offer a 25 per cent bonus on top of a first-time buyer’s savings when the money is used to purchase a home. However, this only applies to properties within the price thresholds set by the schemes, which the BSA said was not effective due to the 35 per cent rise in house prices over the last five years.
There is also a penalty payment of 25 per cent of a first-time buyer’s savings if the property price exceeds the threshold.
The BSA said someone who saved £4,000 a year for five years in a Lifetime ISA would lose their £5,000 bonus and pay a penalty of £1,250 if the property they wanted was above the £450,000 threshold.
Keeping up with changes
The BSA said the thresholds should be increased, as since the scheme launched the gap between average house prices and the limit set had widened.
It also asked for the threshold to be equalised as currently, the Help to Buy ISA limits property purchase values to £250,000 outside London and £450,000 in London while the Lifetime ISA threshold is £450,000 nationally.
The BSA proposed for the threshold to be raised to £550,000 to reflect the growth in house prices and asked for this to be reviewed annually to ensure they remain in line with changes.
The association also called for the Lifetime ISA penalty withdrawal fee to be reduced from 25 per cent to 20 per cent so savers could keep all of their savings and only lose the government bonus.
The BSA said some savers accessed their accounts to help with the rising cost of living and should not be penalised for it. A reduction of the penalty was applied during the height of the Covid-19 pandemic and the BSA said this should be reintroduced on a permanent basis.
Make Lifetime ISAs fairer
Andrew Gall, head of savings and economics at the BSA said raising a deposit continued to be the biggest challenge for those hoping to get onto the property ladder and without reviewing the ISA schemes, they no longer provided the support the intended to when they launched.
He added: “If they are to continue to help first-time buyers, they must keep pace with changes in the housing market.
“Regularly reviewing the threshold in line with house price inflation is the first crucial change needed. Whilst the current £450,000 Lifetime ISA threshold will be sufficient for many parts of the country, in other areas homebuyers may struggle to find a suitable property at this price point.
“We also want the government to make Lifetime ISAs fairer by reducing the withdrawal penalty, so that only the bonus is forfeited for those who access their saving, whether that’s to buy their first home at a price above the threshold, or those who simply need access to their savings – particularly under the current cost of living challenges. Savers who open an account in good faith, should not be financially penalised if, for whatever reason, they cannot meet the specific requirements of the scheme.”