Mortgage experts believe the broad conditions attached to the Bank of England and Treasury’s Funding for Lending scheme could jeopardise its success and will not benefit borrowers who are deemed as niche, such as those with small deposits.
According to the details of the scheme, published earlier this month, eligible institutions will be able to borrow up to 5 per cent of their existing loan books in UK Treasury Bills for a 0.25 per cent fee for a period of up to four years.
The scheme encourages lenders to increase their lending, with a promise of more funds at 0.25 per cent if they do. However, lenders that shrink their loan books will have to pay more for the funds, up to a maximum of 1.5 per cent.
Chadney Bulgin mortgages partner Jonathan Clark says the Government should force participating lenders to venture into areas of the mortgage market they would not normally lend in.
He says: “We hoped the money would be lent on the condition that it was lent to first-time buyers or those looking for 90 per cent or 95 per cent products.
“There is no point in giving banks this cheap money for them to carry on lending on what are seen as safe products, the 60 per cent loan-to-value market. That market is saturated.”
MAC Consulting chief executive Mark Chilton says it will be difficult to measure the scheme’s success without applying firmer conditions to accessing the funds.
He says: “The problem with the scheme is you cannot measure its benefit because you have no idea what lenders would have lent without the cheap funding.
“If the Government had said to the participating lenders it wanted them to allocate a certain proportion of funds to certain areas, such as first-time buyers, for example, then in theory you would have a much better handle on how effective it has been and more people would benefit.”
However, Coreco director Andrew Montlake argues it is not the Treasury or Bank of England’s place to tell lenders how to lend their money.
He says: “I think it is very hard to be too restrictive and you have to give the lenders a little room for manoeuvre.The lenders need to recognise where the issues are and direct the majority of the funds there.”
Just four lenders have signed up for the scheme, including Barclays, Lloyds Banking Group, Royal Bank of Scotland and Nationwide Building Society. L&G Mortgage Club managing director Ben Thompson say the scheme might not generate the necessary levels of competitiveness required to open up the market.
Thompson says: “What we can say with certainty is that we would see more lending into higher-risk areas if there was a genuinely competitive mortgage market. What we have today, with a few notable exceptions, is fierce price competition, especially towards low-risk borrowers. Although this is good for those with little risk attached, it does not serve to boost the wider market.”
Chilton would prefer to see the Government use the money to lend directly to buyers to boost their deposits and therefore gain access to better rates normally associated with lower LTV products.
The Government has already created a scheme similar to this, called FirstBuy, although it is limited to first-time buyers looking to purchase a new-build home. Under the scheme, launched in April last year, up to 10,500 first-time buyers will receive a loan for 20 per cent of the property value, split between the Government and a housebuilder.
He says: “I would prefer the Government to just lend the top 20 per cent to borrowers through a low-cost loan, so they can get a more competitive mortgage rate. There are lots of benefits to this. Lenders would not have to worry about the capital they have to set aside for higher LTV lending and more people could get on the housing ladder without being forced to buy a new-build property.”