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.
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.
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Mortgage brokers said building societies would be most likely to be affected because of the way their funding streams worked.
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.
“Those mortgage lenders that have a greater reliance on retail funding could therefore be hit by a reduction in cash savings.
“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.”
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.
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.
“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 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.
“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.”
“A reduction in Cash ISA allowances is likely to impact that funding and therefore make mortgages more expensive for borrowers.
Fearon has written to Reeves to express his concerns.
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.
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