House prices in the UK are rising at the fastest rate since before the financial crisis, with no signs of the market slowing down since the stamp duty holiday ended.

The latest Halifax House Price Index shows that on a quarterly basis, the house price growth of 3.4% over the past three months is the highest since the end of 2006, with property prices rising an average of almost £1,700 a month since the pandemic began in March 2020.

There are many reasons for the hike in prices. First, the so-called ‘race for space’ during the pandemic, where months spent confined to their homes mean people realised they needed a larger property. This was fuelled by the fact that many people saved a lot of money in lockdown, which they could then put towards a deposit.

The stamp duty holiday was also thought to have fuelled people moving, although there are few signs the market has fallen off a cliff since the tax break ended. Cheap mortgage rates are another factor, with record low borrowing costs meaning more people can buy a home for the first time or upgrade their property.

THE LIFETIME ISA ISSUE

While the boom in prices is good news for anyone selling up, it presents a problem for some first-time buyers. Many will be using a Lifetime ISA to buy their first property, with the Government bonus on the accounts helping to boost deposits. But you can only use the ISA if the value of the property you’re buying is £450,000 or less. Some using a Lifetime ISA face being priced out of the market by the limit.

When the Lifetime ISA launched in April 2017 the average UK house price was £219,000, but it has since shot up to £270,000, according to figures from the UK House Price Index. Despite that, the limit for those using the Lifetime ISA to help fund their deposit has remained at £450,000.

On average, house prices across the UK have risen by 23% since April 2017, and if the Lifetime ISA limit had increased in line with this it would sit at £553,725 today – more than £100,000 higher.

Even if the property limit was pegged to the CPI measure of inflation, it would have increased by 10% since launch, meaning it would have risen to £495,000.

Those buying in London and the south-east are most likely to hit the upper Lifetime ISA limit, as property prices are more expensive in these regions. The average house price in London now stands at £507,000, almost £60,000 more than the Lifetime ISA limit.

While £450,000 is a high house price and would seem unattainable for many people, more and more first-time buyers are buying properties above this limit. Last year 11% of first-time buyers bought a home worth £400,000 or more, compared to 8% in 2017, while 5% of first-time buyers bought a property worth £500,000 and above last year, compared to 4% in 2017.

WHAT HAPPENS IF I EXCEED THE LIMIT?

Anyone who exceeds the £450,000 limit will be hit with the 25% exit charge on the Lifetime ISA, as their purchase will no longer be within the rules. This is the case even if they go £500 over the limit, so buyers need to beware the price of the property doesn’t creep up during negotiations.

If someone had contributed the full £4,000 annual limit since the Lifetime ISA launched they’d have saved £20,000. This would have been topped up by £5,000 from the Government bonus, making a healthy £25,000 deposit. If they then faced that 25% exit penalty, because they exceeded the £450,000 limit, they’d have to pay an exit charge of £6,250 – and face a last-minute scramble to make up that shortfall.

How the Lifetime ISA works

You can use a Lifetime ISA to buy your first home or save for later life. You must be between 18 and 39 to open an account. You can put in up to £4,000 each year, until you’re 50, and the Government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.

You can withdraw money from your ISA if you’re buying your first home (worth up to £450,000); aged 60 or over; or terminally ill, with less than 12 months to live. If you withdraw the money for any other reason you’ll face a withdrawal charge of 25% of the entire pot.

If you’re using the Lifetime ISA to buy your first home you need to ensure the property costs £450,000 or less, you’ve had the Lifetime ISA open for at least a year before you buy the property, you use a conveyancer or solicitor to act for you in the purchase, and you’re buying with a mortgage.

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