New First-Time Buyer ISA Proposed - But Is It Better Than The LISA?

Saving for a house deposit remains one of the biggest hurdles for aspiring homeowners in the UK. While the Lifetime ISA (LISA) has been used successfully by many first-time buyers, rigid rules, price caps, and withdrawal penalties have left many LISA holders frustrated in recent years.

In this post, we look at the potential replacement for LISA currently being considered by parliament, a dedicated first-time buyer ISA (FTB ISA). Read on to find out how the proposed FTB ISA would work, how it compares to the current LISA, and whether it will genuinely be better for first-time buyers in the UK.

How would the new First Time Buyer ISA work?

The proposed First Time Buyer ISA is intended purely to support people in buying their first home, and entirely removes the retirement savings element of the current LISA.

While full details on annual contribution limits, property price caps, and exact bonus percentages are not yet available, several core changes have been outlined:

• No upper age limit: Unlike the LISA, which must be opened by customers between ages 18 and 39 and stops receiving bonuses at age 50, the FTB ISA will have no upper age cap. Anyone aged 18+ looking to buy their first home can participate, which reflects the rising average age of first-time buyers in the UK

• Unauthorised withdrawal penalty removal: Under current LISA rules, withdrawing money for any reason other than home purchase or retirement incurs a 25% penalty. This applies to the total withdrawal, including your original capital, so rather than just removing the government added 25%, it effectively reduces your own savings by 6.25%. The FTB ISA eliminates this penalty entirely. However, the government bonus would still be lost, should the saver use the money for another purpose

• Mortgage purchase requirement: The account can only be used when buying a property with a mortgage, and explicitly excludes cash buyers

• 12-month minimum rule: Account holders must hold the FTB ISA for at least 12 months before becoming eligible to claim the government bonus

Why might the bonus be lower

While the proposed FTB ISA seems like an improvement on the LISA due to fewer restrictions, the new scheme also appears to fall short in other areas.

Similarly to the current LISA system, a 25% government bonus would be paid on top of any amount savers added to their account, However, rather than being paid monthly, with the FTB ISA, the bonus funds would be paid at the point of completion.

Rather than earning interest alongside the saver’s balance each month, the bonus would be calculated on net contributions made over time, and added to the account as a lump sum prior to the home purchase.

This means that savers would lose out on years of compound growth compared to putting their savings into the existing LISA account. However, when it comes to saving for your first home, whether a loss of potential compound interest is balanced by the broader flexibility of the new scheme will depend on your individual circumstances.

Key differences

What this means for aspiring homeowners

First of all, the FTB ISA is currently a policy proposal, with no official launch date. There are likely to be further clarifications to the rules, so jumping to conclusions at this stage is likely premature.

While there are clear improvements in terms of relaxing rules around who can save, and the removal of penalties, to date, there is no confirmation of the property price caps that apply to the current LISA structure. Whether or not this means they will stay the same, remains to be seen, however, it does suggest that any cap will be aligned with both the LISA and the Help to Buy ISA. Aside from the loss of compound interest, a broader issue could therefore be, failure to address how restrictive price caps (currently £450,00 for the LISA) would result in the new scheme also failing to help many prospective buyers in the South East.

If you currently have a LISA, this will remain active. There are no immediate changes planned to the LISA and there will be no forced transfers to the new FTB ISA, should it go ahead. For the meantime, it’s best to stay informed on any official legislative announcements about the proposed scheme, and balance the pros and cons of each when you have all of the information available.

For older mortgage borrowers, it’s hard to argue that this scheme would be largely beneficial, despite any failures to measure up with the existing LISA scheme, purely on the basis that it would be the only scheme of its type in the UK available to the over 40s.

To find out more about first-time buyer schemes and mortgages that may be available to you, get in touch with our experts today