Increasing the cash ISA limit faces potential challenges for lenders, according to financial institutions' cautions.
In a recent development, the Building Societies Association (BSA) has penned a letter to Rachel Reeves, expressing concerns over rumors about a potential reduction in the cash ISA limit. The cash ISA limit currently stands at £20,000, and any reduction could have significant implications for the housing market and mortgage availability.
Deposits stored in cash ISAs are a crucial source of funding for banks, building societies, credit unions, and other providers. These deposits underpin the UK mortgage market, as Chris Irwin, director of savings at Yorkshire Building Society, states. Cash ISAs form a key part of an individual's savings, serving as a place to let their cash grow tax-free.
If the cash ISA limit were reduced, there could be a decrease in savings in Cash ISAs, making low-risk saving options less accessible for many people, particularly those aiming to build a deposit for a mortgage. This could slow the growth of housing deposits if savers are either discouraged or forced into higher-risk investments instead.
Some savers might redirect their surplus savings from Cash ISAs towards paying down mortgages or covering bills, rather than investing in stocks or shares. Surveys suggest that about 11% of Cash ISA savers currently prefer using extra funds for mortgages or bills rather than investing, indicating that a reduced ISA limit could increase immediate spending on mortgages.
On the other hand, limiting Cash ISAs was proposed as a way to encourage more investment in Stocks and Shares ISAs, which are seen as better drivers of long-term economic growth. However, critics argue this might deter savers who are risk-averse, potentially leading to less overall savings available for house deposits or mortgage lending.
Building societies and financial institutions have warned that lowering the Cash ISA limit could impact savings behavior adversely, with possible knock-on effects on the availability of mortgage lending due to fewer accessible savings and deposits from first-time buyers or home movers. If fewer people can save tax-free in cash, there may be less capital flowing into safe savings accounts, which traditionally provide stable funding sources for mortgage lending by banks and building societies. This could make mortgage finance less readily available or more expensive over time, affecting housing affordability and market activity.
In summary, reducing the Cash ISA limit could reduce the ease and safety of saving for a mortgage deposit, potentially constraining mortgage availability and cooling housing market activity, especially among more risk-averse savers who prefer cash savings over investments. The government has postponed these changes in the short term, acknowledging these risks and planning further consultation to consider the full economic impact.
Savings in Cash ISAs could decrease if the limit were reduced, making it more challenging for people to build deposits for a mortgage, particularly those risk-averse. As a result, some might divert their surplus savings to pay off mortography or cover bills instead of investing in stocks or shares.
Consequently, fewer accessible savings and deposits from first-time buyers or home movers could impact the availability of mortgage lending, potentially leading to a cooling of the housing market, especially among risk-averse savers who prefer cash savings over investments.
