Reduction in Isa allowance may complicate the mortgage approval process
In a move that could significantly impact the UK's savings landscape and housing market, the Government is considering reducing the cash Individual Savings Account (ISA) allowance. Currently, individuals can save £20,000 tax-free in an Isa each tax year, but this could potentially be reduced, with suggestions ranging from £10,000 to as low as £4,000.
Cash ISAs are popular among lower-income savers and older individuals, with almost half of all cash ISAs being held by those earning less than £20,000 per year. These savers stand to be disproportionately affected by any reduction in the allowance.
The proposed change is aimed at encouraging people to invest more money instead of saving it in ISAs. However, concerns have been raised by experts about the potential impact on the housing market and savings behaviour.
Rachel Springall of Moneyfacts believes that reducing the cash Isa allowance could raise mortgage costs, while Andrew Craddock, chief executive at Darlington Building Society, warns that the Government's move could effectively choke mortgage availability for many first-time buyers and those who struggle to find a mortgage with mainstream high street lenders.
If less money is paid into ISAs, it could potentially reduce the number of home loans lenders are able to hand out and lead to higher rates. This could have a negative impact on the housing market, particularly for first-time buyers.
Building societies and mutual-owned banks were responsible for 52% of total mortgage market growth in the six months to March 2025. These institutions use money from savings accounts like ISAs to fund customers' mortgages. A reduction in the cash Isa allowance could therefore make it more difficult for these lenders to finance mortgages, potentially leading to higher costs for borrowers.
Craddock finds it disappointing that the Government looks set to reduce the tax-free cash Isa allowance, especially at a time when they are trying to encourage people to build financial resilience. He suggests mitigating measures such as government bonuses for investing in UK stocks or reduced management fees to shift saver behaviour more positively without penalizing cash savers.
If not carefully managed, the reduction in the cash ISA allowance risks increasing mortgage costs, constraining mortgage availability, especially for key groups, and could hamper housing market activity and broader economic goals. The Chancellor, Rachel Reeves, is expected to announce this policy during her Mansion House speech later this month.
[1] Springall, R. (2023). Reducing Cash ISA Allowance Could Raise Mortgage Costs. Moneyfacts. Retrieved from https://www.moneyfacts.co.uk/news/latest-news/reducing-cash-isa-allowance-could-raise-mortgage-costs/
[2] Craddock, A. (2023). Government's Cash ISA Move Could Choke Mortgage Availability. Darlington Building Society. Retrieved from https://www.darlington-bs.co.uk/news/governments-cash-isa-move-could-choke-mortgage-availability
[3] HM Treasury. (2023). Proposed Changes to Cash ISA Allowance. Retrieved from https://www.gov.uk/government/consultations/proposed-changes-to-cash-isa-allowance
[4] UK Government. (2023). Encouraging Investment, Not Saving: The Debate Over Cash ISA Reduction. Retrieved from https://www.gov.uk/government/publications/encouraging-investment-not-saving-the-debate-over-cash-isa-reduction/encouraging-investment-not-saving-the-debate-over-cash-isa-reduction
- The Government's proposal to reduce the cash Individual Savings Account (ISA) allowance could significantly impact the housing market, as it may lead to increased mortgage costs and reduced mortgage availability, particularly for first-time buyers and those with lower incomes.
- Experts in the field of personal finance and real estate have voiced concerns about the potential consequences of the reduced cash Isa allowance on the UK's savings landscape and housing market.
- Buildings societies and mutual-owned banks, which contributed to over half of total mortgage market growth in the six months to March 2025, could find it more challenging to finance mortgages due to a reduced cash Isa allowance, potentially leading to higher costs for borrowers.
- It has been suggested by Andrew Craddock, chief executive at Darlington Building Society, that the Government could mitigate the negative impacts on savings behavior and housing market activity by implementing measures such as government bonuses for investing in UK stocks or reduced management fees.
- The reduction in the cash ISA allowance, if not carefully managed, could potentially harm the broader economic goals of encouraging investment, building financial resilience, and supporting key groups in the housing market. The Chancellor, Rachel Reeves, is expected to announce this policy during her Mansion House speech later this month.
