Lifetime ISA: London buyers face penalty trap as property prices outstrip cap

The Lifetime ISA (LISA) was set up in 2017 to help people save for retirement or purchase a first home costing up to £450,000. First-time buyers can put aside £4,000 a year and get an annual government bonus of 25%.

But if savers are unable to find a property below the cap and need to withdraw the money, they face a financial penalty which costs them 6.25% of their savings.

With the average first-time buyer now spending £463,000 in London, the scheme's property price cap is seen by many as being out of step with the capital's housing market.

Based on figures from September 2025, BBC analysis found that the median LISA user could afford:

The average flat in only 16 of London's 33 boroughs

The average terraced home in only three boroughs

The average semi-detached home in one borough

No borough had an average detached home within reach

In 13 boroughs, the median price for all types of properties was above £450,000.

Those making unauthorised withdrawals outnumber the people using a LISA for a house purchase: in 2024-25, across the UK about 87,250 people made authorised withdrawals for a house purchase, while 129,200 made unauthorised withdrawals.

We speak to young Londoners about their experiences with the scheme.

'It hindered not helped us'

Fraser Glen, 35, and his partner Sophie Bauer, 30, both started saving into Lifetime ISAs a few years ago with the intention of using the funds to get on to the property ladder.

But after searching for flats in 2024 - looking at over 30 properties in central and east London - they realised how difficult it was to find one under the price cap that would meet their needs.

"People may think we're talking about luxury, big properties with big bedrooms, multiple properties - that's not what we were talking about at all," Fraser says.

"We're talking about one, two-bedroom flats; the costs significantly more than £450,000 if you want to live within touching distance of central London where lots of us work."

In order to buy their "modest two-bedroom flat" in Tower Hamlets for £521,000, Sophie withdrew her money from the LISA and lost £3,500.

Fraser decided to keep his money in the LISA to avoid the penalty - leaving £50,000 of his savings "in limbo", as he can't access the money until he is 60 years old without losing a chunk of it.

"This is a savings tool which hindered rather than helped us, which leaves a bad taste," he says.

"What you're either doing is encouraging young people to move out of London where a lot of jobs and opportunities are, and then paying huge amounts to get in on the train, or you have to cash out like we did and take the loss," Sophie says.

Calvin Kern, 23, has been saving in the Lifetime ISA for two years and hopes to buy a two-bedroom property with his girlfriend before he turns 30.

Unable to buy in Stratford, they've now set their sights on Epping or Edgware, further east in Zones 4 and 5.

"It's more expensive than I thought. We've had to change what we're looking for. It's a bit frustrating. And if anything, the prices are going to go up."

Calvin wants to see the penalty removed if somebody withdraws.

"If you don't have a safety net in London like a family... some people would be forced to take their money out and lose out on the 25%, which makes the situation even worse.

"London is so expensive and a lot of young people are forced to work here - having the pressure of the penalty in London and trying to make it... that can be stressful."

Still, Calvin is trying to remain optimistic.

"I think after all this time I am able to see some light at the end of the tunnel and make a plan, even if the plan is not 100% and it's not the life I imagined it would be."

Jordan Waite, 31, put most of his savings into a Lifetime ISA during the pandemic. In October 2025, he and his partner bought an ex-council flat in Archway for just under the £450,000 LISA cap.

But he describes the search as a "massive struggle".

"It's only when you start looking that you realise quite how little there is," he says.

While buyers can find properties within the cap by compromising on location or taking on high service charges, he says it's difficult to find a "future-proof" home for those planning to start a family.

Jordan and his partner were happy with the location but settled for a flat with an 82-year lease, which they now plan to spend £10,000 extending.

"It poses a bit of a problem when it hits 80 years in terms of remortgaging and whether we could sell it on."

He says he would recommend the LISA to people living outside London, noting that a friend bought a house with one in Manchester. But in the capital, he describes it as a trap.

Jordan wants the withdrawal penalty scrapped. "I would accept not getting the bonus, but the thing that really hurt was the penalty. It's not the golden scheme it was sold as."

Helen Knapman, news and investigations editor at MoneySavingExpert, says the Lifetime ISA can help many savers get on the property ladder but needs reform.

She points out that buyers forced to withdraw their savings because a property exceeds the £450,000 limit can lose part of their own money through the 25% withdrawal charge, and says she wants a "two-pronged approach" with both the penalty removed and the property price cap raised.

An HM Treasury spokesperson said: "The government is committed to making the aspiration of home ownership a reality for as many people as possible and will build the homes this country needs - we've overhauled the planning system, invested a record £39bn in social and affordable housing, and supported developers to get on and build and weather any geopolitical pressures."

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