Saving a deposit remains one of the biggest hurdles facing first-time buyers. Now the government is proposing a new savings product designed specifically to help people get onto the property ladder.
The new first-time buyer ISA (FTB ISA) is set to replace the Lifetime ISA (LISA), although an introduction date has not yet been announced and further details are still to come.
On the surface, the new ISA removes some of the restrictions that have made the Lifetime ISA less attractive to certain savers. Look a little closer, however, and there are important differences that could mean an existing LISA remains valuable for some prospective homeowners.
The biggest difference is its purpose. While a Lifetime ISA can be used towards the purchase of a first home or to save for later life, the new FTB ISA will be specifically for first-time property buyers.
There will also be a significant change to the age restrictions. A LISA can only be opened between the ages of 18 and 40, with contributions stopping at age 50. The proposed FTB ISA will be available to savers aged 18 or over with no upper age limit.
That could make the new account particularly useful for people who come to home ownership later in life and have previously been unable to benefit from a LISA.
Another important difference concerns withdrawals. Taking money from a Lifetime ISA for a purpose other than an eligible first home purchase or later life generally results in a 25% withdrawal charge. Importantly, this can leave a saver with less than they originally contributed.
The FTB ISA is expected to remove that penalty, giving savers greater flexibility if their circumstances or plans change.
There is one area where the existing Lifetime ISA could retain an important advantage.
With a LISA, the government bonus is added to the account as contributions are made. This means the bonus itself can potentially earn interest or benefit from investment growth while the money remains in the account.
Under the proposed FTB ISA, the government bonus will only be paid when a property is purchased.
For someone saving over several years, that difference in timing could affect the eventual value of their savings. We will need to see the full details of the new product before meaningful comparisons can be made.
The government has also indicated that any future change to the current £450,000 property price cap will apply to both products.
Existing LISA savers will not be forced to move to the new product.
Anyone who already has a LISA, or opens one before the FTB ISA is introduced, will be able to continue contributing to it under the existing LISA rules.
It will not be possible to transfer money directly from a LISA into the new FTB ISA. Instead, savers with access to both products will be able to decide each tax year whether they contribute to their LISA or their FTB ISA.
Importantly, funds held across both accounts will be able to be combined when the time comes to purchase a first home.
The removal of the upper age restriction and withdrawal penalty could make the new first-time buyer ISA more accessible and flexible than the Lifetime ISA.
That does not necessarily mean it will always be the better option.
Receiving the government bonus earlier through a LISA provides the opportunity for that money to grow alongside your own savings. Depending on how long you intend to save and how the money is held, that could prove valuable.
For people who already have a Lifetime ISA, there is therefore no reason to assume that the arrival of its replacement means their existing account has lost its usefulness.
The right choice will depend on individual circumstances and, importantly, the final rules when they are published. Anyone saving towards their first home should therefore consider the differences carefully rather than simply choosing the newest product.
The government’s current guidance on Lifetime ISAs can be found here.
All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.
