Money-saving expert Martin Lewis has issued a stark warning to homeowners and those dreaming of buying their first home, cautioning that they could face hefty penalties. Speaking on BBC Radio 5 Live, he highlighted the pitfalls of ISAs and LISAs, which are falling behind due to their outdated structure.

The Lifetime ISA (LISA) aims to assist those aged 18 to 39 in climbing onto the property ladder by offering a 25% top-up on savings. Despite its launch in 2017, the housing market has since undergone significant changes, rendering the scheme’s parameters less applicable.

Martin explained: “You can take the money out only for one of two reasons: number one, you are buying a first time property, you’ve never bought a property before, you’ve never owned a property before and that property has to be worth under £450,000. The second reason is you’ve hit age 60 and then you can take the money out and you get to keep the bonus.”

He continued, stressing the severe penalty for withdrawing funds for any other purpose: “No one who has opened the ISA has hit age 60 yet because they haven’t been around long enough. It’s a savings account. It’s just a tax-free savings account, but the real key to it is the 25% state bonus. The problem with a lifetime ISA…the big one is if you take your money out for any other reason than to buy a first time qualifying property or at retirement effectively when you’re age 60, you take a 25% penalty.”

To illustrate the issue, Martin detailed how saving £10,000 would typically yield a £2,500 bonus, totalling £12,500. However, a 25% penalty on withdrawal for unqualified reasons would reduce the sum to £9,375, resulting in a loss of £625 from the initial investment, reports the Manchester Evening News.

He pointed out that in the tax year of 2024, a staggering £15 million in penalties was dished out to taxpayers. He said: “Now I don’t have that much of a problem with that because that’s to ensure that people are only using the LISA for the reasons intended.”

He continued: “This is my problem, the LISA was launched in 2016. The property threshold limit in 2016 was £450,000 the property limit is still £450,000.”

Addressing the plight of savers, especially in areas like London and the southeast, he noted: “Many people, particularly in London, the southeast and other urban metropolitan areas, have been priced out due to rising house prices. They’ve saved as the government advised for their first property, but now their property is valued over £450,000. To withdraw the money, even to purchase a first-time property which is the purpose of this product, they face a significant penalty.”

Drawing conclusions from his analysis of fines, Martin estimated that around £1.8 million a year are unjustly paid in penalties by those using the LISA exactly as intended.

Campaigners are pressing for changes to the government scheme for would-be first-time buyers that “fines” people if they use it to buy a home costing more than £450,000. After Mr Lewis raised the issue previously

person expressed worries about the London housing market, stating: “I live in London and only apartments are affordable at the £450K cap. A decent apartment (e.g. energy-efficient, quiet neighbourhood) hovers around £450K. My concern is that when interest rates decrease (and prices increase), buying an apartment in London will be infeasible.”

Another posted: “House price in my area was capped at 250k, relatively useless. Seems like it’s London and Everywhere else just like most things… Doesn’t meet it’s intended purpose.” Another said: “Probably would have done had I not been as old as I am -59. But it does need some fixing re the cap.”

Mr Lewis, the founder of MoneySavingExpert.com, is among those calling for an urgent revamp of the rules that apply to lifetime ISAs, which let people save for a first home or for their retirement. He previously said the scheme was, in its current form, “broken” because it unfairly takes money off some young people and they get back less than their investment.