Reeves Proposes Cash ISA Reform, Risks Soaring Mortgage Costs

In a significant policy shift, Rachel Reeves, the UK Shadow Chancellor, has announced plans to reform Cash Individual Savings Accounts (ISAs) in a bid to stimulate investment in the London Stock Exchange, which has been facing declining activity. During a speech at the Mansion House on July 15, 2025, Reeves proposed slashing the annual ISA allowance from £20,000 to as low as £5,000. This decision has sparked considerable debate regarding its potential impact on mortgage costs and the broader economic landscape.

The proposed reduction in ISA allowances has raised alarms among the UK's largest mortgage lenders, including Yorkshire Building Society, Coventry Building Society, and Skipton Building Society. Chris Irwin, a spokesperson for Yorkshire Building Society, expressed concerns that such a cut would lead to increased mortgage costs. "Reducing ISA deposits could make mortgages more expensive and less available," Irwin stated, highlighting the reliance of building societies on cash ISAs as a substantial portion of their retail savings balance, which currently accounts for 39% of total savings.

Reeves's initiative aims to redirect investment from cash savings to equities, thereby invigorating the London Stock Exchange, which has been described by many analysts as 'dying.' However, critics argue that the proposed changes could backfire. Martin Lewis, founder of Money Saving Expert, labeled the proposed ISA reform a "huge mistake," arguing that reducing the allowance would not encourage savers to invest in the stock market but would instead deter them from saving altogether.

The implications of this policy shift are multifaceted, with potential economic repercussions extending beyond the housing market. According to a 2023 report by the Bank of England, cash ISAs play a crucial role in funding mortgage lending, and any reduction in their attractiveness could lead to tighter credit conditions for borrowers. Historical data indicates that during periods of similar policy changes, such as the austerity measures implemented in 2010, the housing market experienced significant turmoil, leading to increased mortgage costs and reduced housing affordability.

The debate surrounding Reeves's proposal comes at a time when the UK economy is grappling with inflationary pressures and a cost-of-living crisis. Many households are already facing financial strain, and further increases in mortgage costs could exacerbate these challenges. The Office for National Statistics reported in June 2025 that average mortgage rates have already risen by 1.5% over the past year, contributing to the difficulties faced by first-time buyers and low-income families.

In an international context, similar reforms in other countries have produced mixed results. For instance, in Canada, changes to tax-advantaged savings accounts led to increased investment in the stock market but also resulted in higher borrowing costs for consumers. Experts argue that the UK could learn from these experiences to better understand the potential ramifications of Reeves's proposed changes.

Looking forward, the economic landscape remains uncertain. Should the proposed ISA reforms take effect, analysts predict that mortgage costs could rise significantly, with estimates suggesting an increase of up to 0.5% in the average mortgage rate. This could further complicate the already challenging housing market and impede economic recovery efforts. As the July 15 speech approaches, the debate surrounding the reforms will likely intensify, with stakeholders from various sectors weighing in on the potential consequences of this pivotal policy change.