Lifetime ISA savers are increasingly finding themselves unable to use the funds as they were intended.
The savings scheme offers an attractive 25 percent Government bonus on any deposits, providing an £1,000 a year boost if you save the maximum £4,000.
But the funds are intended to go towards buying your first property, and as the property has to be worth no more than £450,000, many savers are finding themselves unable to use the cash towards their desired home.
Research from Hargreaves Lansdown found the area where the highest proportion of their clients have a Lifetime ISA is south west London, but the average first-time home there costs £545,000, almost £100,000 above the limit for using the funds.
Of the top 10 areas of the UK with the most ISA savers, five of them have first-time property prices above £350,000. One of these is Kingston, also south west of the capital, with first-home property prices at £452,000.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: "House prices are closing in on the record highs of 2022, leaving first-time buyers with a mountain to climb in raising a deposit. In September this year, the average first-time buyer property hit £232,769 - just £1,000 off their post-pandemic peak.
"The fact that mortgage rates remain relatively high - with the average 2-year rate at almost 5.4 percent - means monthly payments are also a horrible stretch unless they can build a reasonable downpayment."
"The group is calling for the Lifetime ISA rules to be changed so the property price limit is linked to house prices."
Lifetime ISA funds can go towards a first home or can be accessed when you turn 60. If you withdraw for other reasons you face a penalty - something the wealth firm would also like to see changed.
Ms Coles said: " The penalty also needs to be reassessed. The 25 percent penalty for accessing money for purposes other than buying a first home or for retirement not only removes the effect of the government bonus, it also applies a 6.25 percent penalty on people's hard-earned savings.
"Cutting the penalty to 20 percent means people will not lose any of their own savings if they need to access their money early."
Another restriction on Lifetime ISAs is you can only open one from age 18 to 39, and you can only make deposits until the age of 50.
Ms Coles said this should be changed so people can save up until the age of 55, to provide more means for people to save for their retirement.
She commented: "Analysis from the Hargreaves Lansdown Savings and Resilience Barometer has shown this would particularly help self-employed people, who are chronically under-prepared for retirement.
"This change would benefit 70 percent of the self-employed who missed out on the Lifetime ISA because they were too old when it launched."
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