My Lisa provider charged a big penalty when I bought a house – is it a mistake?

I have had a Lifetime Isa (Lisa) for the past 5 years, in which I save for a down payment on a house.

During this time I have saved £12,000 which has increased to £15,000 when HMRC’s contributions are included.

Together with my partner we have now received an offer on a house. This house will be my first house, but my partner has had a house before.

Since my partner has owned a property before, we are fortunate that he contributes a large down payment. We buy a house together for just over €450,000.

As you know, the fact that the house costs over £450,000 means I can’t access the HMRC bonus in my Lisa.

It’s a shame, but I accept that these are the rules. However, I am extremely disappointed that in addition to taking away the bonus, my Lisa provider is also taking over £750 of my own money as a penalty.

I think it would have been acceptable if they took the interest off my account, but that they would punish me by taking my own money that I have saved is pretty heartbreaking.

Is this something that other readers have come across and if so, is there anything I can do about it? Via email.

Ed Magnus of This is Money replies: This is without a doubt a common conundrum. Many will be saving for their first home with a Lisa.

Once opened, the government will put in £1 for every £4 you save, giving a £1,000 bonus on the maximum £4,000 per year you can put away. Essentially it is free money.

Unfortunately, a Lisa can come back to bite you as there are also some strict rules to follow that will cost you dearly.

The money saved can only be used for a first home, which should cost less than £450,000, or for retirement – and those who break the rules will be fined 25 percent on the amount withdrawn.

The key point here is that the penalty applies to the total amount withdrawn, not the total amount added.

So in our reader’s case, that means the total money they put into the Lisa, plus the government bonus, plus any interest accrued in that time.

As our reader points out, one of the most important rules is the fact that a Lisa can only be used for a first home if the property costs £450,000 or less.

Our reader had accrued £15,000 in the Lisa account: £12,000 in money they had deposited, as well as interest, and £3,000 added by the government.

A 25 per cent fine on £15,000 equates to £3,750 meaning they lose £750 more than the £3,000 added by the 25 per cent government surcharge.

A spokesperson for the savings website Savings Guru said: “This is not the Lisa provider’s decision, but the government’s decision.

Cash Isas are set up with a 25 percent fine if savers break them. This is meant to cover the bonus, but it’s the whole amount involved, so savers lose it if they break it

‘For example, £1,000 saved gets a bonus of £250, but if broken, the 25 percent penalty is £1250, not £1,000, so the saver gets £987.50 back – ie £1250 minus £312 .50 fine.

“The government has reduced this to 20 percent during Covid, but has brought it back up to standard. Your reader’s anger on this occasion should be directed at the government, not the provider.”

How does the Lisa work?

Anyone between the ages of 18 and 39 can open a Lisa and they can add to it until they are 50.

Once people turn 50, they can no longer deposit into it or earn the 25 percent bonus. However, their account will remain open and their savings will still yield interest or investment returns.

It can also be used as part of your £20,000 annual personal Isa allowance and as with the standard Isa they can choose to save or invest their money through a Lisa.

Two people buying together can each use their own Lisa for the down payment.

It can also be used to buy with someone who is not a first time buyer, although they obviously couldn’t use their own Lifetime Isa if they had one.

The money in a Lisa can either be used for a down payment on a first home or withdrawn from age 60 to help fund retirement. I can’t be used for anything else.

People can put in up to £4,000 a year and the government adds a 25 percent bonus to your savings, up to a maximum of £1,000 a year.

This means that for every £4 saved, the government will add £1 up to a maximum of £1,000 each tax year until someone turns 50.

What should you pay attention to?

When using the Lifetime Isa to buy a home, it is critical that people are aware of the restrictions that can void the bonus.

Firstly, as already mentioned, the value of the property, whether you are buying alone or as a couple, should not exceed £450,000.

They must be a starter to be able to use the Lifetime Isa for the purchase of real estate.

This means that they have not previously owned a home in the UK or anywhere else in the UK. It is worth noting that the property they buy must also be in the UK.

They also need to buy a house in which they intend to live. The scheme is not intended for people who buy an owner-occupied home or holiday home.

They will have to use a typical repayment mortgage where they pay back a portion of the loan, as well as the interest, each month until they finally pay off the mortgage.

For example, they cannot use an interest-only mortgage, where they only pay the interest per month and the loan amount remains the same.

Finally, the Lisa cannot be used for a home purchase made within 12 months of opening.

How to withdraw the money for a home deposit?

When buying a home, it is important that the account holder does not simply withdraw the money, because then the fines will be levied.

Instead, they must apply to the Lisa provider to send the money to the attorney handling the purchase.

The money can be used for the deposit when contracts are exchanged and prior to completion, although there can be no more than a 90-day delay between them.

If the sale falls through the attorney, the attorney can put the money and bonus back into the Lisa – although it must be the same amount.

What are the Best Cash Lisa Rates?

For anyone saving to buy a home within the next five years, keeping the money in savings rather than investing is wise as this will prevent any short-term dips in the stock market.

Lisa rates are not as competitive as other savings deals, but the government revaluation means that as long as they are comfortable with the Lisa rules, it will be the best savings tool to maximize returns.

The best cash Lisa deal is currently offered by Moneybox which pays 2 percent, although this rate includes a 0.2 percent fixed bonus for the first year.