Funding for Lending Scheme to be scrapped for mortgages

29 November 2013MeetMyAgent

The Governer of the Bank of England, Mark Carney, yesterday announced that the house purchasing element of the Funding for Lending Scheme is to be scrapped in February 2014 – bringing the scheme to a close a year earlier than expected.

However, the scheme will still be available for banks to lend to small businesses, although the amount of funding will be reduced by half from £10 to £5 for every £1 lent.

House building firms saw approximately half a billion wiped off share prices at close of trading after the news broke. According to the decision makers, this move will not have any effect on the Help to Buy scheme, which provides 95% mortgages to buyers.

Rate increases ahead?

Launched in July 2012 the Funding for Lending Scheme aimed to incentivise banks to lend through the provision of additional cheap credit for every pound lent to homeowners and small businesses.

This has led to a significant reduction in mortgage rates in existence prior to the scheme, although the best rates remain reserved for those with high deposits around 40%.

It is possible we could see rates increasing or a contraction in lending for residential mortgage products after February as banks will no longer have access to cheap credit for this type of lending. However, with Help to Buy now in place it is unlikely to drastically reduce the wave of buyers entering the market via the scheme, and property portals and estate agents alike have reported higher numbers of buyer enquiries.

On the road to recovery

Commenting on the scheme, Mr Carney said: “Since its launch, the FLS has contributed to a substantial fall in bank funding costs. 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.”

Avoiding another housing bubble

Mr Carney said it was time to “take the foot off the accelerator” of a recovering housing market, warning that a housing bubble could derail the economy.

The withdrawal of the scheme from the housing market indicates that the Bank of England and Treasury are acutely aware of the effects the current momentum in rising house prices could have on the economy in the  future, and are acting in order to prevent another housing bubble.

While government intervention has seen acitivity increase, we are in an artificial market where interest rates are at an historic low of 0.5%, mortgage rates are being heavily influenced by the provision of cheap money, and buyer activity is being inflated by virtue of Help to Buy. Factor in a lack of stock, with vendors holding out for higher prices or unable  to move, and it is easy to see that current market conditions are likely to be unsustainable should interest rates rise and government intervention ultimately ceases.