28th November 2013
The Bank of England is to withdraw its scheme to provide cheap funding to banks which then boosts the retail mortgage market. It will continue Funding for Lending where the money is directed at supporting lending for business but is aiming for a more focused approach.
The scheme will come to an end in January next year though Help-to-buy remains unaffected.
The Bank introduced funding for lending in July 2012. The scheme was widely credited with bringing down and keeping down mortgage rates but its impact on business lending was more muted.
Now the Bank says the mortgage market has established its own momentum. It says that credit conditions for smaller businesses have also improved to a lesser extent.
The FLS will provide continued support for lending to businesses in 2014, with incentives in the scheme skewed heavily towards lending to small and medium-sized enterprises.
Bank of England Governor Mark Carney says: “Over the past year the FLS 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.”
Chancellor George Osborne says: “The FLS proved to be a successful tool in supporting the recovery. Now the housing market is starting to pick up, it is right we focus the scheme’s firepower on small businesses. Small firms are the lifeblood of our economy. That is why we are reforming the banks, introducing the employment allowance and now focusing the FLS to support them”.
The boss of the mortgage banks’ trade body the CML, Paul Smee is reasonably relaxed about the end of the scheme. He says: “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.”
However some experts are concerned about the how the Government will establish a dividing line between businesses and individual lending particularly where commercial mortgages are concerned.
David Whittaker, managing director of Mortgages for Business, said: “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.”