First-time buyers hoping to use a Lifetime ISA to buy their first home could be squeezed out of buying a terraced house in more than 50 regions of the UK, new analysis from AJ Bell shows.

The government pays a 25% bonus, up to £1,000 a year, into each Lifetime ISA account, which can then be used to buy a first home. But the property cannot cost more than £450,000, with the limit remaining unchanged since the accounts were launched in 2017.

Because property prices have soared in that time, many wannabe first-time buyers now face being priced out of their area if they want to use the Lifetime ISA. AJ Bell analysis shows that aspiring homeowners could be frozen out of using a Lifetime ISA to buy a terraced house in 54 regions by the end of this parliament. Even a typical flat is projected to cost more than the £450,000 limit in five years in 17 regions, including many on the fringes of London.

The analysis, conducted by AJ Bell based on Land Registry data and OBR forecast house price increases, illustrates the dilemma faced by those saving for their first home. Savers unable to use their Lifetime ISA to buy a property face the prospect of incurring an early withdrawal charge if they close the account.

A PARTICULAR PROBLEM IN LONDON

While in many parts of the country a typical first home will cost far less than £450,000, large parts of London are already well over the threshold for a terraced house or a flat. Lifetime ISAs may not be designed to help people buy homes in Kensington or Fulham, but Watford and Welwyn surely shouldn’t be off limits.

Areas including Merton, Ealing and Barnet threaten to become too expensive for first-time buyers hoping to use the government-backed savings vehicle to even buy a flat. Across large swathes of the country first-time buyers looking to buy a home will be excluded from the scheme. While smaller properties should fall under the threshold in most areas, a young family or a couple who rent but want to move to a semi-detached house with room to grow their family will find they’re excluded from using the government’s first-time buyer savings plan in large parts of the UK.

Increasing the maximum property value limit for using the account by a small amount each year would make a massive difference to so many individuals. The property valuation cap hasn’t changed since the Lifetime ISA launched seven years ago, even though property prices have subsequently moved higher across parts of the UK. It means account holders wanting to use the money are often left with a dilemma – buy a cheaper property than you really want, or close the account and face an early exit penalty.

While the savings can be held until age 60 and used for retirement, most first-time buyers will need to use the money in the account for their deposit, even if it means they’re forced to cash in their Lifetime ISA early and swallow the penalty.

DISCLAIMER: AJ Bell owns Shares magazine. The author (Laura Suter) and editor (Tom Sieber) of this article own shares in AJ Bell.

Regions where first-time buyers may not be able to use a Lifetime ISA

AJ Bell calculates an additional 18 regions of the UK would be out of reach for first-time buyers hoping to buy a typical terraced home in five years’ time at the end of this parliament if no action is taken. That’s in addition to the 36 areas where the average terrace already costs more than £450,000.

AJ Bell calculates flats in another six areas of the UK, including Brent and Southwark, could exceed the £450,000 maximum property value in five years’ time. That’s on top of the 11 regions where the average flat already costs more than that threshold.

This analysis is based on the average price of a terraced house or flat in August 2024 calculated by HM Land Registry and uprating the value each year using annual house price growth forecasts from the OBR.

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