A Labour government would reinvent a century-old housing bond system to generate £5bn to build 125,000 new homes, Ed Miliband has announced. The Labour leader plans to take the new Isa scheme for first-time buyers announced by the chancellor, George Osborne, earlier this year and use it to finance wide-scale housebuilding.

Labour claims Britain’s chronic housing shortage is being fuelled by coalition schemes such as help to buy, but that no action is being taken to boost supply. Miliband pledged to revive the dream of homeownership for people struggling to get on the housing ladder by introducing a future homes fund to boost new builds.

In a speech to supporters in Warrington on Saturday, he promised that people who had lived in an area for three years would be guaranteed priority access to new homes under a first-time buyers first policy.

He said: “There’s nothing more British than the dream of homeownership. Starting out in a place of your own. But for so many young people today that dream is fading.”

The money will be generated by channelling the investments banks and building societies proceeds from the new first-time buyer Isa into housing. Labour said savers would still be guaranteed the same return on their money and be able to withdraw it any time. The £5bn it would generate would help Labour leap towards its target of 200,000 new homes by 2020.

Miliband has already announced plans to end landbanking by developers by pledging to introduce “use it or lose it” laws and he also plans new garden cities.

The future homes investment fund will be targeted at new sites where local first-time buyers will get priority. It draws on previous schemes such at the housing bonds used in the 1920s to fuel building and will not need extra borrowing or spending, according to Labour.

Miliband said: “Our plan is the first real plan for housebuilding in a generation. We will build at least 200,000 homes a year by the end of the parliament. We won’t let those large developers just hoard land – waiting for it to go up in value when it could be used to build homes. We’ll say: either you use the land or you lose the land. We will build a new generation of towns, garden cities and suburbs creating over half a million new homes.

“We will make housing the top priority for additional capital investment. And today I can announce the next step in our plan. The next Labour government will create a new future homes fund. The banks will benefit from the taxpayer support we will provide to help people save for their first home.

“In return, we will expect the banks to invest in homes for the next generation – unlocking £5bn for 125,000 homes. A Labour government will get Britain building again.”

The help to buy Isa announced by Osborne in his budget would see first-time buyers rewarded for saving up to £12,000 in one of the new savings accounts with a government contribution of up to £3,000 towards a deposit on their first home.

Osborne said: “The help to buy Isa will support over a million first-time buyers achieve their dream of earning their own home – and with one badly thought-through policy, Ed Miliband would put all that at risk. It would undermine homeownership and harm savers.

“After just one week of the campaign, Ed Miliband has confirmed he’s anti-savers, anti-business and anti-aspiration. He’s just not up to the job.”