The Bank of England and the Treasury have changed the terms of the Funding for Lending Scheme (FLS) extension to re-focus incentives towards supporting business lending.
They said that while growth in household loan volumes remains modest, activity in the housing market is picking up and house price inflation appears to be gaining momentum. As a result there is no longer a need for the FLS to provide further broad support to household lending, they said.
Mark Carney, the governor of the Bank of England, said: “Over the past year the Funding for Lending Scheme has contributed to the recovery by helping to significantly improve credit conditions, especially for households. The changes announced today refocus the FLS where it is most needed – to underpin the supply of credit to small businesses over the next year – without providing further broad support to household lending that is no longer needed.”
The CML’s 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.”
Kevin Mountford, head of banking at MoneySuperMarket, said the move could result in improved rates for savers. He said: “The Bank of England’s Funding for Lending Scheme (FFL) has helped drive lending within the mortgage market by making cheap funds available. While the scheme has achieved its goal in driving growth in the UK housing market, it has also had a major impact on UK savers, with rates being suppressed due to Banks and Building Societies not needing to generate inflow of funds. The timing of the removal could be questioned, especially when the ‘Help to Buy’ scheme is in its infancy and we are unaware of its impact on house buying so far.
“Although the changes to Funding for Lending will take time to filter through into the borrowing and savings markets, it is possible that we may start to see rates edge up again next year – although there is no certainty this will happen. Competition within the mortgage market means that borrowing rates are at record lows and growth within the housing market may help keep these rates low. Savings rates have been kept low by FFL so we expect a greater interest in savings next year from banks, although it remains to be seen whether rates will rise to the pre-Funding for Lending levels.”
David Whittaker, managing director of Mortgages for Business, called for more clarity: “Before the world and their wife jump the gun on what this means for the industry, it’s vital the Bank of England clarify what will and will not be included in the new ‘leaner’ scheme.
“If they intend to cease funding for residential mortgage lending only then that is one thing. But if the intention is to include commercial mortgages within the cut then that’s an entirely different story. The line between commercial mortgages and business lending can often be a very blurred one, so if the intention is to remove funding for these loans as well then it could derail the scheme entirely. More clarification please, Governor.”