Reducing cash ISA limit will make lending difficult and expensive, warn providers

Mortgage and loan providers have rallied together to urge the chancellor to leave the cash ISA limit unchanged at £20,000, saying a reduction would make lending more difficult and expensive.

In an open letter, the Building Societies Association (BSA) wrote to Rachel Reeves to express their “concern” over rumours that the cash ISA limit could be reduced.

It said that while cash ISAs form a key part of an individual's savings as a place to let their cash grow tax-free, deposits stored in them are also an “an important source of funding for banks, building societies, credit unions and other providers”.

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These financial institutions then use the deposits to fund loans to households and businesses, with the BSA saying that cash ISAs help keep mortgages and loans “affordable and accessible”.

The association warns that a big cut in the cash ISA limit could therefore “lead to higher borrowing costs and reduced access to credit across the economy”.

“This would undermine efforts to stimulate economic growth, including the government’s commitment to delivering 1.5 million new homes,” it added.

The BSA also warned that a lower cash ISA allowance would send a discouraging message to savers who are using it to plan for the future, as well as “undermining a product that has stood the test of time”.

Since the start of the year, speculation has been mounting over whether or not the chancellor will reduce the amount of your tax-free ISA allowance that you can direct towards cash savings.

Reports suggest that Reeves and her team in the Treasury have been exploring the idea of reducing the cash ISA limit to as low as £4,000 to incentivise Brits to put their ISA savings into the stock market.

The move would come at a time when UK plc is feeling unloved, and the London Stock Exchange is struggling to keep up with its American cousins.

While the Treasury has neither confirmed nor denied that the cash ISA limit will be reduced, the chancellor said earlier this year that she wanted to encourage a “culture of investing” in Britain, like there is in the United States.

Reeves also told the media that she wanted to “get the balance right between cash and equities to earn better returns for savers” in their ISAs.

Reeves could announce reforms to the cash ISA at her Mansion House address on 15 July.

Will reducing the cash ISA limit make it more difficult to buy a home?

As outlined in the open letter, the BSA argues that a reduction in the cash ISA limit will lead to fewer deposits being made with lenders. With fewer deposits, the building societies argue that they will find it more difficult to provide loans and mortgages as they will have less money to give out.

Chris Irwin, director of savings at Yorkshire Building Society, supports this point, telling MoneyWeek that combined cash ISA balances in the UK amount to more than £300 billion and that a reduction to the cash ISA limit would lead to “significant wider impacts”.

Irwin says many financial institutions use cash ISA deposits to fund mortgages and loans to households and businesses.

“Cash ISA deposits underpin the UK mortgage market and represent a direct investment in the UK economy. Reducing ISA deposits could make mortgages more expensive and less available.”

Irwin adds that cash ISAs make up 39% of all building societies’ retail savings balances, providing a “vital source of funding to allow us to offer more mortgages to those that need them”.

With such a large proportion of deposits being held in the tax-free savings products, a reduction in the limit could severely restrict lending activities.

He also warns that a reduction in the cash ISA allowance will jeopardise the government’s headline ambition to build 1.5 million new homes as “cutting ISA limits could make that more difficult and have a significant impact on economic activity.”

Cecilia Mourain, chief homebuying and savings officer at the savings and investing app Moneybox, agrees that a cut to the cash ISA allowance would be the wrong move by the government.

Mourain argues that the move will “discourage sensible saving behaviour, weaken demand for a popular product and disrupt the flow of capital that supports mortgage lending and economic stability”.

Moreover, Mourain says that such a reform would not support the government’s ambition to build a stronger investing culture.

“We know that a cultural shift towards investing won’t come from cutting the cash ISA allowance, it will come from working with the industry to build confidence among savers,” she adds.