Experts say building societies, which often offer among the best deals for first-time buyers, would be affected by the move
A cut to the cash ISA allowance would be likely to lead to higher mortgage rates, Rachel Reeves has been warned, with first-time buyers among those that would be most heavily affected.
The Chancellor Rachel Reeves is set to go ahead with plans to reform cash ISAs – although any move is expected to be announced in the autumn, rather than around the time of this month’s Spring Statement.
Reforms aim to encourage people to divert cash saved in tax-free cash ISAs into stocks and shares, with ideas under consideration said to include capping the tax-free cash ISA allowance at £4,000 – significantly lower than the current £20,000 level.
But sector experts claimed such a move would likely reduce the funding available to some mortgage providers, by diverting money away from their cash ISA products.
This would limit the capacity they have to lower their mortgage rates and would mean there is a smaller pot to help potential buyers get on the property ladder.
Mortgage brokers said building societies would be most likely to be affected because of the way their funding streams worked.
But they have said that if these providers were unable to offer cheaper rates, it could lead to bigger banks being less competitive too.
Building societies have told The i Paper that they use cash ISA deposits to fund their mortgage lending. These 42 societies provide 24 per cent of outstanding mortgages in the UK.
David Hollingworth, associate director at L&C Mortgages, told The i Paper: “Restrictions in cash ISA allowances may be a measure to encourage investing in stocks and shares but will curtail options for those wanting to hold their cash in an ISA wrapper.
“Those mortgage lenders that have a greater reliance on retail funding could therefore be hit by a reduction in cash savings.
“If they have to turn to other sources of funding and pay more to attract that funding it will have a knock on effect for the cost of mortgage deals, pushing up rates and monthly payments.
“The impact of those higher costs may be felt harder by the mutual sector whereas big banks may have broader funding lines they can draw on but competition in the market helps to keep rates down for consumers, so reducing the choice of deals could have a negative impact for the wider market.”
Mortgage rates have been relatively steady in recent months, though experts broadly expect them to fall this year, if the Bank of England cuts interest rates as expected.
The average two-year fixed rate is now 5.35 per cent whilst the five-year is 5.19 per cent, according to Moneyfacts, although the cheapest rates for both are nearer 4 per cent.
The current Government has repeatedly criticised previous Conservative administrations for the rise in mortgage rates seen over the past few years, and so would likely be keen to avoid an uptick in costs during its tenure.
Nick Mendes of John Charcol brokers said: “Building societies frequently provide some of the most competitive mortgage rates, particularly with products for those with small deposits, that offer a lifeline for first-time buyers, and those with complex circumstances that require more underwriting time such as adverse credit, expats, or complex income structures.
“If their funding costs rise due to lower deposit levels, it could make it harder for them to compete on price, which in turn could impact mortgage affordability for some borrowers.
“While bigger banks may be less directly affected, a squeeze on building societies’ ability to lend competitively could reduce choice in the market, potentially leading to less competition and higher rates across the board.
For some buyers, deals offered by building societies are among the cheapest on the market.
For example, for those with just a 5 per cent deposit, although Lloyds offers the best rate on the market at 4.85 per cent, the next cheapest two providers are both mutuals – Scottish Building Society offers a rate of 4.89 per cent and Leek Building Society offers a rate of 4.98 per cent.
Andrew Gall, head of savings and economics at the Building Societies Association, said: “Cash deposits are an essential part of the funding which building societies use for mortgage lending, supporting housebuilding and homeownership.
“Substantially reducing the role of cash ISAs could have knock-on impacts on the interest rates and availability of these loans if providers had to raise the funds from other sources.”
Richard Fearon, chief executive of Leeds Building Society, said: “Reducing the amount which can be saved either now or in the future would have significant effects on savers, and mortgage holders.
“A reduction in Cash ISA allowances is likely to impact that funding and therefore make mortgages more expensive for borrowers.
“As with all building societies, the money our members save with us is used to fund our mortgage lending and put homeownership within closer reach of more people.”
Fearon has written to Reeves to express his concerns.
Currently, people can save £20,000 in any type of ISA each tax year, and the gains or interest they make are free of tax.
Though no decision on changes to ISAs will be announced in March, Government insiders insist that the choice not to announce them around the time of the Spring Statement does not delay the plans.
The Treasury is expected to consider a range of reform options to “get the balance right between cash and equities” and collect views from the industry before making a decision.