HM Treasury has launched a consultation on a new First Time Buyer ISA that would replace the Lifetime ISA (LISA) in a move designed to simplify support for aspiring homeowners and remove controversial withdrawal penalties.
The proposed product would be dedicated solely to helping first-time buyers purchase a home, ending the dual-purpose role of the LISA, which was introduced in 2017 to support both homeownership and retirement savings.
Under the plans, savers would receive a government bonus when they withdraw funds to purchase their first property, rather than receiving annual bonus payments as they do under the current LISA system.
Crucially, savers would be able to access their money without penalty if their circumstances change, removing the 25% withdrawal charge that has been widely criticised for reducing savers’ original capital.
WITHDRAWAL PENALTIES
The Treasury said the LISA is “not working well for many” consumers, citing increasing numbers of unauthorised withdrawals and evidence that more account holders have lost part of their savings through withdrawal penalties than have used the product to buy a home.
The government also pointed to findings from the Treasury Select Committee, which concluded that the product’s design was flawed and often poorly understood by consumers.
The new ISA would be available to all first-time buyers aged 18 and over, removing the upper age limit that currently restricts new LISA accounts to those aged between 18 and 39. The Treasury said this reflects the fact that the average age of first-time buyers continues to rise.
The government intends the product to operate within the existing ISA framework, with both Cash and Stocks & Shares versions available.
Savers would need to hold the account for at least 12 months before claiming a bonus towards a house purchase. Existing LISA holders would be able to continue contributing under current rules indefinitely.
EFFECTIVE SUPPORT
Paula Higgins (main picture, inset), CEO of HomeOwners Alliance, says: “We have been campaigning for some time for the Lifetime ISA withdrawal penalty to be scrapped, so the move towards paying the government bonus only when someone buys their first home is very welcome. It would stop savers being punished for accessing their own money when life takes an unexpected turn.
“Our research shows that 1.9 million aspiring homeowners do not believe they will follow in the footsteps of their homeowning parents. That underlines just how important effective support for first-time buyers is – and why this scheme needs to work for people across the whole country.
“Removing the upper age limit is also sensible. First-time buyers are getting older, and the current rules are increasingly out of step with today’s housing market.”
PRICE CAP WORRIES
But she adds: “We are alarmed that the £450,000 property price cap may be left untouched. It has not changed since 2017 and is now badly outdated, particularly in London and the South East.
“The whole point of this product is to help first-time buyers across the country. Yet those buying in the most expensive markets arguably need the most support, not a scheme that penalises them for purchasing an average-priced home in their area.
“This is a well-intentioned reform, but unless the cap is reviewed, it risks fixing one unfairness while leaving another firmly in place. The Treasury should update the cap now and future-proof the scheme by ensuring it rises in line with house prices, rather than allowing it to become outdated again.
“First-time buyers need a product designed for the housing market of the future, not one based on prices from nearly a decade ago.”
The consultation runs until 17 August and forms part of the government’s wider efforts to support first-time buyers alongside plans to increase housing supply and improve mortgage affordability.
Read the full consultation document HERE.
