Bank of England to turn off Funding for Lending tap for mortgages
The Funding for Lending Scheme was launched in the July 2012 in an attempt to drive down bank funding costs and increase mortgage and business lending.
But with the mortgage market now improving the Bank of England and Treasury have agreed to refocus the scheme solely toward business lending from 2014.
“Since its launch the FLS has contributed to a substantial fall in bank funding costs,” Bank governor Mark Carney said.
“This has fed through to significant improvements in household credit conditions. Credit conditions for smaller businesses have also improved, but to a lesser extent, and lending to businesses overall remains muted. Meanwhile a recovery has taken hold in the UK although it is still at an early stage.
“These positive changes in general economic conditions have been accompanied by a strengthening of the housing market. Although the growth in household loan volumes remains modest, activity is picking up and house price inflation appears to be gaining momentum.
“In light of these developments, you and I have agreed that we should refocus the FLS so that it continues to support lending to the business sector, without adding further broad support to household lending at a time when that is no longer necessary.”
Chancellor George Osborne said the government would continue to support the housing market in a more targeted way using the Help to Buy scheme.
Aldermore mortgages managing director Charles Haresnape said all lenders had been preparing for the withdrawal of Funding for Lending.
“All lenders in the Funding for Lending Scheme have known it has a limited shelf life. Most lenders have been anticipating the scheme going and there are more funding options out there, whether that’s starting to use savings or securitisation. There’s enough funding out in the market.
He told Mortgage Solutions he hopes the scheme would now encourage more commercial and business lending from major brands.
“Some high street lenders have a limited appetite for business lending and some of the smaller banks like us and Shawbrook Bank have been doing a lot of business relative to our size. Hopefully this will encourage the big lenders to do more.”
CML director general Paul Smee said: “Although the changes to the FLS may be a surprise, they are not a shock. Mortgage lenders are well equipped to meet their funding needs, as wholesale funding market conditions have improved and retail deposits are robust.”
Henry Knight, managing director of broker Springtide Capital said: “We estimate that the lower FLS funds will begin to run out during January resulting in the rates increasing from about February next year. Those with higher loan to value mortgages will continue to see their rates protected by the Help to Buy scheme, so we expect those with loan to values at 80% and below will see the largest relative increases. That said, whilst the inevitable consequence will be a rate increase, we estimate that FLS has kept rates around 0.5% lower than they would have normally been and therefore people can expect a gradual increase rather than anything more dramatic”.