Since the launch of the Government and Bank of England’s Funding for Lending scheme, the market wide belief has been that releasing cheaper funds for lenders to draw upon was nothing but a positive step. However, since the scheme launched in August 2012, the net lending figures for the sector have fallen by £1.8billion.
The aim of the scheme was to allow UK lenders access to less costly funds from the Bank of England, in order to provide retail customers, including contractors, affordable borrowing for mortgages and small business loans. The proviso was that a lender utilising the funds would need to increase or at least maintain their current level of lending to contractors in these areas. Over the past 9 months, interest rates for mortgages have rapidly dropped, which would suggest that the scheme had shown signs of a nominal effect on the market. Despite this, the Treasury select committee suggested that there was a clear favouritism to the mortgage sector, as rates for small business loans had not seen the same level of reductions. The BOE headed the call, with an additional year being added to the scheme and more emphasis on the focus for lending to small and medium businesses being applied.
Commenting on the impact the scheme has had, Simon Butler of Contractor Mortgages Made Easy said “Expectations on lenders to increase their lending output are high, and there has certainly been a noticeable shift in their attitude to loaning funds. Part of the reason the scheme has taken some time to kick off could partly be attributed to lenders dropping rates early on, but still maintaining tighter criteria when processing applications.
“Since the turn of the year, this has loosened, and it is now apparent that calls from the Financial Conduct Authority to lend sensibly, but to not be as restrictive, seem to be filtering through. It is highly likely that contractor-friendly lenders will continue to reduce current interest rates over the remaining six months of the year, which should encourage contractor’s confidence and will help to stimulate the market further.”
The Funding for Lending scheme is not the only Government backed plan that is currently under the spot light. The head of global strategy at Societe Generale, Albert Edwards, has declared his belief that George Osborne’s Help-to-Buy scheme will ultimately fuel an artificial increase in property values, while forcing younger UK citizens into “indentured servitude.” Edwards, a respected City commentator, feels that the scheme to boost the housing sector through Government backed mortgage funds will not resurrect the market, but in fact push house prices beyond the reach of the first time buyers it was meant to aid.
Edwards said: “Young people today haven't got a chance of buying a house at a reasonable price, even with rock bottom interest rates. The Nationwide Building Society data shows that the average first-time buyer in London is paying over 50% of their take home pay in mortgage repayments – and that is when interest rates are close to zero."
When commenting on why he felt the scheme was counter intuitive for first time buyers, Edwards stated: “Why are houses too expensive in the UK? Too much debt. So what is George Osborne's solution for first-time buyers unable to afford housing? Why, arrange for a government-guaranteed scheme to burden our young people with even more debt! Why don't we call this policy by the name it really is, namely the indentured servitude of our young people.”
Mr Edwards is not alone in his response to the perceived risks of the scheme. Sir Mervyn King, the soon to be ex-governor of the Bank of England, has persistently said that he feels the plan has to be a temporary solution. He said that the scheme “is a little too close for comfort to a general scheme to guarantee mortgages. We had a very healthy mortgage market with competing lenders attracting borrowers before the crisis, and we need to get back to that healthy mortgage market. We do not want what the United States have, which is a government-guaranteed mortgage market, and they are desperately trying to find a way out of that position.”
Article by: Jon Sheilds, Media Executive at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager
Tel: 01489 555 080