Half a million young savers and first-time buyers risk facing hefty fines to access their savings under the Government’s Lisa scheme, Martin Lewis has warned.
The MoneySavingExpert founder said that had a private firm acted in a similar way, it would “be getting close to mis-selling”.
The Government savings plan for younger first-time buyers boosts deposits by 25pc when they are used for a home.
But the £450,000 threshold for a property to qualify has been frozen since the scheme launched in 2017, while UK house prices have grown by 35pc. If the threshold had risen, it would now be £607,500.
It means that savers who can’t find a suitable property under the threshold face a penalty of 6.25pc, leaving them with less than they put in.
Mr Lewis said: “Savers had a legitimate expectation that – over six years, amid huge house price inflation – under a fair system there would have been some uprating to the maximum house purchase limit.
“Without it, a chunk face being priced out, having to spend more on a property, and then having to pay the state a fine to access the money they’d put aside for a deposit. Then, to take the biscuit, the fact they then have a reduced deposit can decrease the value of the mortgage they will be accepted for.”
MoneySavingExpert has sent a report to the Treasury and the Financial Conduct authority, urging the Government to update the rules.
Mr Lewis said: “The changes we’re asking for – either ditching the fine for those buying houses that no longer qualify or increasing the threshold, or both – are simple, easy to put into practice and would cost a relatively small amount in Government terms.”
The consumer advocate website wants the Government to either raise the threshold to £607,500 and then index-link it to future house price growth or remove the penalty.
Half a million people aged 18 to 39 have made use of the savings scheme since its launch in 2017. Savers can save up to £4,000 a year, receiving a 25pc boost resulting in a bonus of up to £1,000. For many, it is now emerging as a false economy however, with the only way to avoid the penalty being to put the money towards a pension instead.
Jess Rostron, a 38-year-old architect from London, found the scheme “disappointing and frustrating” when she was ready to buy last year after saving into it for four years.
She said: “A £450,000 limit seemed like a reasonable cap for a first-time home in London when LISAs launched, but now it’s not. I feel I’m trying to use a Government scheme for exactly what it was intended for, but can’t.”
Ms Rostron had saved £18,800 but would lose £4,700 in capital, interest and bonuses, leaving her £940 worse off than had she not used the scheme. She chose to rent for longer rather than buy over the threshold.