Advocates are pushing for revisions to a UK government program aimed at potential first-time homebuyers, which penalizes individuals who utilize it to purchase a dwelling priced above £450,000.
Martin Lewis, the creator of MoneySavingExpert.com, is advocating for a prompt overhaul of the regulations surrounding lifetime Isas. These accounts allow individuals to save for their first home or for their retirement.
Lewis informed Guardian Money that the current structure of the scheme is flawed as it unjustly deducts funds from certain young individuals, resulting in a lower return on their investment.
In 2017, Lifetime Isas were introduced. Individuals can contribute a maximum of £4,000 per year until they reach 50 years of age. The government will match 25% of individuals’ contributions each month, up to a maximum of £1,000 per year.
The official records show that the 25% bonus has been highly appealing, as 662,000 lifetime Isas received deposits in the year 2021-22. Currently, the estimated number of active accounts is between 700,000 and 800,000.
If someone utilizes the plan to purchase their initial residence, the value of the property cannot exceed £450,000. This limit has not changed since April 2017, despite the fact that average house prices in the UK, as recorded by the Land Registry, have increased by approximately 33% during that time.
Assuming the cap had increased in accordance with this expansion, it would currently be approximately £600,000.
Individuals who take out their savings to use for purchasing a property that exceeds the price limit will incur a 25% fee for an “unauthorized withdrawal”. This fee is intended to recoup the government bonus, but it also controversially takes a portion of the saver’s initial investment.
According to the Land Registry, the typical price paid by first-time home buyers is lower than the set limit of £450,000 in most areas of the country. In England overall, it was recorded as £258,000 in August. However, in London, the average amount paid was higher at £464,000. In inner London, the average price was even higher at £546,000.
According to Lewis, the current system is not meeting the needs of buyers. For instance, if a young individual has reached the maximum limit of their lifetime Isa within the past five years and has contributed a total of £20,000, they will receive a £5,000 bonus from the government, resulting in a total of £25,000 for their home deposit.
Due to the steep increase in local housing costs in the last five years, the house they are purchasing now exceeds the £450,000 limit by several thousand pounds, and they are unable to negotiate a further discount.
In this scenario, the person must pay a 25% fee in order to access their deposit. This means they will not only miss out on the £5,000 bonus, but they will also have to give a portion of their savings to the government. After the penalty is deducted, they will only have £18,750 remaining, which is less than if they had not taken any action.
Assuming no interest is gained, the example does not reflect reality as most savers would have earned some returns. Due to low interest rates, the penalty may have surpassed any profits.
“The government is deducting £1,250 from these youths, despite their responsible savings in a government program,” stated Lewis. “This is unfair and highlights flaws in the system.”
Lewis suggested a straightforward solution: if you have a lifetime Isa and are purchasing a property that exceeds £450,000, the penalty should be reduced from 25% to 20%. This means you will receive your initial investment back, but not the bonus.
Lewis is optimistic that the government will yield to public pressure and make changes to the regulations, potentially during the spring budget. He believes that the government and chancellor will have to find solutions that are both popular and cost-effective. According to his estimates, the expense of addressing this issue would be relatively small, likely in the single-digit millions.
According to Lewis, the cap of £450,000 should be adjusted to reflect changes in housing prices. However, he noted that this decision falls under policy and his current priority is addressing the issue of individuals facing consequences for making responsible choices.
Catherine West, the Member of Parliament for Hornsey and Wood Green in north London, has expressed concerns about the rising prices that prevent many potential first-time home buyers from using their lifetime Isas. In an interview with Guardian Money, she stated that she plans to utilize her position in parliament to advocate for the government to reevaluate the lifetime Isa regulations in order to encourage more people to save.
The CEO of OneFamily, Jim Islam, stated that the lifetime Isa is a beneficial product that has assisted numerous individuals. However, he believes that further efforts can be made to aid those striving to purchase a home.
Similar to Lewis and other individuals, his business desires the unapproved withdrawal fee to be reduced from 25% to 20%. He also stated that the current cap of £450,000 is no longer relevant and should be raised.
The spokesperson for the Treasury stated that the lifetime Isa price cap of £450,000 is significantly higher than the average cost of a home for first-time buyers outside of London. This indicates that the cap is appropriately aimed at assisting the majority of first-time buyers throughout the UK.
The government believes that eliminating or decreasing the 25% withdrawal fee could lead to the misuse of lifetime Isas. However, they have stated that they are continuously reviewing all aspects of the savings tax system, including the potential benefits of raising the lifetime Isa property limit.
There are several companies that offer lifetime Isas, and one of the top-paying ones at the time of writing was offered by the app-based provider Moneybox. It pays 4.25% interest (made up of a 3.5% rate, plus a fixed one-year interest bonus of 0.75%).
Katie Oliphant, a 26-year-old, is among the hundreds of thousands of individuals contributing funds to a lifetime Isa. She resides in Cambridge and holds the position of HR coordinator at St John’s College, which is affiliated with the University of Cambridge.
“The price cap of the scheme may not be realistic for those looking for a two or three-bedroom house in a desirable location, as it is quite expensive at £450,000,” she stated.
Oliphant and her partner both possess a lifetime Isa through OneFamily, a financial services company owned by its members.
In 2018, while in her last year of university, she opened an Isa account based on her father’s recommendation. Since then, she has been consistently depositing money every month, including some funds that were initially meant for a cancelled trip due to the COVID-19 outbreak.
Currently, she has a total of £18,600 in her Isa account. However, she recently stopped her automatic payments due to the current financial difficulties, stating “I simply cannot afford it.”
Oliphant and her significant other are currently leasing a one-bedroom apartment in the heart of Cambridge and plan to purchase a home within the next five years.
According to her, she searched for properties on Rightmove and found that a two-bedroom apartment without a garden or balcony in central Cambridge would cost approximately £450,000.
She expressed concern about the £450,000 cap, stating that it would not be a problem for those purchasing in other regions of the country.
I do not believe that is equitable. I am confused as to why there is a cap in place.
Oliphant expressed appreciation for the government’s creation of a program to assist first-time homebuyers, but noted that certain rules and regulations can work against them.
Source: theguardian.com
