With significant implications for the cost of mortgages, the Bank of England has surprised the large mortgage sector in the UK by announcing plans to scale back one of its major schemes designed to back the home loans market. Reuters reports that the Bank have ‘moved to head off the risk of a bubble in house prices’ by withdrawing its Funding for Lending scheme to mortgage lenders.
The scheme will remain but solely to provide support to small businesses, not the wider mortgage market. Keep reading to find out more and the likely implications of the changes to the flagship government initiative.
Funding for Lending will now focus solely on small businesses
Under the Funding for Lending scheme, banks and building societies have been able to access cheap credit from the Bank in proportion to how much they increase lending. However, in light of a stronger than expected economic recovery, the Bank of England is set to withdraw the Funding for Lending scheme for mortgage business.
The scheme has been moderately successful although critics say that it has helped high value mortgage customers with a small deposit more than it has helped first time buyers. Mortgage rates over recent months for borrowers with a large deposit have hit record lows.
Reuters reports that the scheme will now focus solely on enabling greater lending to small firms that still find it hard to borrow. Mark Carney, the Governor of the Bank of England, said the Bank was also ready take larger measures to control the housing market if needed. These could include a cap on how big mortgages can be relative to property values and borrowers’ income.
“We did not see an immediate threat coming from the housing market but we are concerned about the prospective evolution of the housing market,” he told reporters. “The concern is where this could go. We definitely see some short-term momentum.”
Mr Carney said the changes to the scheme would not affect the Help to Buy initiative, which aims to lift construction and assist home-buyers who lack large mortgage deposits. What it will affect is the cost of mortgages.
Cost of mortgages set to rise
Islay Robinson, CEO of London mortgage broker and million pound mortgage specialist Enness Private Clients said: “With house prices starting to rise the Bank clearly believe that the housing and mortgage markets no longer need this support.
“While banks will continue to benefit from access to cheap finance for business lending, they will no longer be able to tap the Bank of England for cheap funds for mortgages.
“Naturally, this is likely to result in an increase in the cost of mortgages. Lenders have been able to price their deals at record lows in recent months thanks to Funding for Lending. Now that they will have to access more traditional forms of funding – deposits and the money markets – the costs of this are likely to be higher and I expect them to pass this on in the form of more expensive mortgages,” he added.
However, risks remained as many countries, firms and individuals were highly indebted and vulnerable if a sharp rise in interest rates outpaced any increase in their incomes.
