Since the Bank of England confirmed last week that a full scale withdrawal of the Funding for Lending scheme for mortgage funding was to take place, speculation has been rife as to whether lenders would take this opportunity to raise interest rates.
Since the introduction of the scheme in 2012, the market has seen a trend of consistent rate reductions, and many market experts have commented that the reductions have given the market a much needed lift. As banks have taken the opportunity to offer historically low interest rates, market activity for purchasing and re-mortgaging has vastly increased on the post-credit crunch years.
The proposed closure of the scheme had been slated as early 2015, but the announcement to withdraw earlier than planned suggests that the Bank of England feel the mortgage sector has recovered sufficiently that the holding hand of the FLS is no longer required. From February 2014 the scheme will be withdrawn for mortgage funding, but will remain for business lending until January 2015.
The BOE have moved to quell fears that the removal of supported mortgage funding will not have an impact on the Help to Buy scheme, as they noted that the sole purpose of the FLS was to raise levels of lending, not to assist borrowers struggling to save a sufficient deposit to purchase.
During a speech last week on the matter, Mark Carney, governor of the Bank of England said: “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.”
In its Financial Stability Report issued towards the end of November, the BOE made it clear that lessons had to be learned from the recent collapse of the market, and the reduction of government backed support needs to occur to allow the market to become self-sufficient. The report noted: “Risks may grow if stronger activity is accompanied by further substantial and rapid increases in house prices and a further build-up in household indebtedness, which is already elevated for some households.
“These risks would be accentuated if underwriting standards on mortgage lending were to weaken as has been the case in previous house price cycles.”
Experts have seen the decision as a sensible move, but have confirmed that the change will provide impetus for lenders to consider rate rises. Simon Butler, of Contractor Mortgages Made Easy, said: “Activity over the past 12 months has grown month by month, and shows no sign of abating. It would be surprising to see lenders raise rates during a period that is traditionally a quieter time for the market, so some movement is more likely to occur around spring of 2014, if lenders do decide it is time to make increases at all.”
Article By: Jon Shields, Media Executive at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager
Tel: 01489 555080