December 5th, 2013
The Bank of England has shown its first outward sign that the UK property market is threatening to overheat.
One of the first measures that the Bank introduced last year to kick-start the economic recovery, was to make cheap funds available to banks for mortgage lending via the Funding for Lending Scheme (FLS). It was conditional that the banks use any money borrowed from the Treasury for personal mortgage lending, and also lending to small businesses, otherwise the rates that the banks borrowed at from the Treasury would multiply.
Mark Carney, Governor of the Bank of England, announced last week that FLS was being withdrawn for mortgage lending purposes from February next year, with the small business stimulus remaining intact.
“The recovery in the market has broadened out across the UK – the question is where does it go from here?” Mr Carney asked. “By acting now, authorities are reducing the likelihood that larger interventions will be needed. It is no longer appropriate to have our foot on the accelerator.”
The central bank used to exercise their power to set interest rates to control lending and subsequently the UK property market. Recent years and the global financial crisis have seen the Bank and the Treasury use more creative means to exercise control over the recovery. Rate setting is now seen as more of a last resort, as figures have shown that even a modest increase may cause UK households to struggle to maintain commitments.
Earlier this year the UK think tank, the Resolution Foundation, looked at the outcome of a ‘modest rate increase’ on debt-laden households. The results did not make pretty reading, with the group predicting that a 2.9% increase in a borrowing rate would put over 1 million households in financial difficulty by 2017.
As it happens, most commentators now predict that the first rate increase will happen in 2015, making the prediction of Resolution Foundation a bit more of a stark reality for many contractors with mortgages and unsecured debt. As 2013 draws to an end, a rate increase of 2.9% does not look unreasonable.
As many contractors now look to schemes like phase 2 of Help to Buy, where a 5% deposit can be used with participating lenders to buy a new home, many will pose the question ‘how long will this last?’
The reality of the modern economy is that the Bank of England will only look at rate increases once they have flexed other financial muscles, such as the withdrawal of Help to Buy. Unfortunately for the UK freelance community, this process has already started.
Article By: Taj Kang, Business Development Director at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager