A potential reduction in the cash ISA (Individual Savings Account) allowance could inadvertently lead to an increase in mortgage rates, particularly impacting first-time buyers, experts warn. Chancellor Rachel Reeves is poised to implement reforms to cash ISAs, although any announcement is anticipated to come in the autumn rather than during this month’s Spring Statement.
The proposed reforms aim to steer individuals away from cash savings in tax-free ISAs towards investing in stocks and shares. Among the ideas under consideration is a significant reduction of the tax-free cash ISA allowance to £4,000, a stark contrast to the current limit of £20,000. Experts in the sector have expressed that such a shift could diminish the funding available to mortgage lenders, as savings would be redirected away from cash ISA products.
This change, if enacted, could limit the ability of mortgage providers to lower their interest rates, thereby reducing the financial resources available to help prospective buyers enter the property market. Mortgage brokers emphasize that building societies could be the most affected due to their reliance on specific funding streams.
According to building societies, cash ISA deposits play a crucial role in financing their mortgage lending operations. These institutions collectively account for 24% of all outstanding mortgages in the UK. David Hollingworth, associate director at L&C Mortgages, noted in a statement to The i Paper, “While the intention behind restricting cash ISA allowances may be to promote investment in stocks and shares, it will limit options for those who prefer to keep their cash within an ISA structure. Mortgage lenders that depend heavily on retail funding could see significant impacts from a drop in cash savings.”
Hollingworth further warned, “If lenders are compelled to seek alternative funding sources at higher costs, it will likely lead to increased mortgage rates and monthly payments, putting additional strain on borrowers. The mutual sector might feel this impact more acutely, while larger banks could draw upon broader funding lines. However, reduced competition in the market could lead to higher rates for consumers.”
Currently, mortgage rates have remained relatively stable, yet many experts predict a decline this year contingent on anticipated interest rate cuts by the Bank of England. Presently, the average two-year fixed mortgage rate stands at 5.35%, with the five-year rate at 5.19%, though the most competitive rates for both are closer to 4%.
The current government has consistently criticized previous Conservative administrations for the upward trajectory of mortgage rates in recent years, indicating a desire to prevent further increases during their term. Nick Mendes from John Charcol brokers highlighted, “Building societies often offer some of the most competitive mortgage rates, particularly for first-time buyers with smaller deposits. If their funding costs escalate due to lowered deposit levels, their ability to remain price-competitive will diminish, adversely affecting mortgage affordability for many.”
- For first-time buyers, building societies frequently provide accessible mortgage solutions.
- Examples include competitive rates for those with just a 5% deposit.
- Lloyds currently leads with the best rate at 4.85%, followed by Scottish Building Society at 4.89% and Leek Building Society at 4.98%.
Andrew Gall, head of savings and economics at the Building Societies Association, stated, “Cash deposits are vital for the funding of mortgage lending by building societies, facilitating homeownership and housebuilding. A substantial reduction in cash ISA relevance could adversely affect loan interest rates and availability if providers are forced to source funds from alternative channels.”
Richard Fearon, chief executive of Leeds Building Society, expressed grave concerns, stating, “Limiting the amount individuals can save now or in the future will have significant ramifications for both savers and mortgage holders. A decrease in cash ISA allowances is likely to impact funding, leading to higher mortgage costs for borrowers. The funds deposited by our members are crucial for financing our mortgage lending, bringing homeownership within reach for a larger number of individuals.” Fearon has formally communicated these concerns to Chancellor Reeves.
Currently, individuals can save up to £20,000 in any ISA type each tax year, with all interest and gains being tax-free. While no immediate changes to ISA regulations will be disclosed in March, government insiders have suggested that the decision to delay the announcement around the Spring Statement does not hinder the reform agenda. The Treasury is expected to evaluate various reform options to “achieve a balance between cash and equities” while soliciting industry feedback before finalizing any decisions.
