UK Households Face Mortgage Concerns Amid ISA Allowance Changes

More than 14 million households in the UK are at risk of facing increased mortgage costs due to proposed changes to the cash Individual Savings Account (ISA) rules. Currently, the cash ISA allowance stands at £20,000, but discussions are underway regarding a potential reduction to £10,000. This change, if implemented, could significantly impact household savings and mortgage accessibility.

Rachel Reeves, the Shadow Chancellor, has been warned against these alterations by industry leaders. Charlotte Harrison, Chief Executive of home financing at Skipton Group, cautioned that such a move could make mortgages “both more expensive and harder to access.” The implications of declining cash ISA deposits could reverberate throughout the housing market.

According to a report in the Financial Times, the Chancellor is currently reviewing plans that could halve the cash ISA limit. With approximately £300 billion held in cash ISAs, this product remains the most popular among savers, outpacing stocks-and-shares ISAs. Tom Selby from AJ Bell highlighted that the existing market is overly complex, stating it is “behaviorally illiterate.”

Michael Healy from trading platform IG took a more extreme position, labeling cash ISAs as “completely incompatible with long-term wealth creation.” He advocated for the complete elimination of the cash ISA allowance, arguing that it does not foster investment growth.

Concerns about the potential changes were echoed by Andrew Prosser from InvestEngine, who stated that restricting cash ISA allowances would not effectively drive investment. Instead, it may lead to savers maintaining their funds outside of tax-free wrappers, thus increasing their tax burden. “The result could be that UK savers end up worse off, not more invested,” Mr. Prosser remarked.

At a Mansion House speech earlier this month, Reeves indicated her willingness to consider “further changes to ISAs” and to engage with stakeholders to achieve “better outcomes for both UK savers and for the UK economy.” This statement has garnered mixed reactions from the financial community.

The Building Societies Association praised the Chancellor’s speech, asserting that cash ISAs serve a vital role in promoting financial resilience, saving for first homes, and managing finances during retirement. They emphasized that these funds are not idle; rather, they support mortgage and other lending activities.

Brian Byrnes from Moneybox characterized the proposed changes as “the right diagnosis but the wrong prescription,” suggesting that while the issues may be valid, the solutions may not align with the needs of savers.

In response to these concerns, a Treasury spokesperson reaffirmed the importance of cash savings, stating, “Cash savings are important for people looking to put cash away for a rainy day, and we will protect that.” As discussions continue, the outcome of these proposed changes remains uncertain, leaving millions of UK households to consider the potential impact on their financial futures.