Plans by the Labour government to significantly reduce the annual cash ISA allowance could have a direct and negative impact on mortgage rates in the UK, financial leaders have warned.
The Proposed Cut
In Wednesday's Autumn Budget, Chancellor Rachel Reeves is expected to announce a 40 per cent reduction to the tax-efficient savings limit. The maximum amount Britons can save annually in a cash ISA is set to fall from £20,000 to £12,000.
This move has sparked immediate concern from building societies, which rely on consumer savings to fund their mortgage lending activities.
Industry Leaders Voice Concerns
Robin Fieth, chief executive of the Building Societies Association, expressed his disappointment. He stated that a cut to £12,000 would not encourage investment but would instead add complexity and risk damaging the overall ISA brand. "This may also deter people from saving and investing," he added.
The warning was echoed by Tim Bowen, a former building society chief executive now leading fintech firm Mutual Vision. He described the potential cut as a "backward step for UK savers but the whole building society ecosystem."
Craig Fish, director of Lodestone Mortgages, provided a stark assessment of the potential consequences for the housing market. "Slash cash Isa allowances and you reduce the very savings pots these lenders depend on," he said. "Less money in means less money out, and that can only lead one way: tighter lending and potentially higher rates." He warned this could choke off competition in the mortgage market.
The Broader Financial Impact
The core fear is that by making saving less attractive, the policy will reduce the pool of capital available for lenders. With less money deposited, building societies and banks will have less to lend out as mortgages. This contraction in supply, against steady or rising demand, typically leads to an increase in the cost of borrowing – meaning higher mortgage rates for homebuyers and those remortgaging.
However, some experts point to a different underlying issue. Greg Davies of Oxford Risk suggested that cash ISAs are "behaviourally flawed" because they reward people for holding cash, even when investing might better serve their long-term financial goals. He estimates the average investor loses 2-3% annually from holding too much cash.
