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What will the mortgage industry take from the FLS announcement?

The Bank of England has announced the scheme will now run until 2015, with some adjustments to the lending criteria.

Paul Smee CML

The Bank of England last week confirmed a year-long extension to the £60bn Funding for Lending scheme, with a renewed focus on lending to small and medium-sized businesses.

The aim of the scheme – to boost net lending to SMEs and households – remains unchanged but participating lenders will have access to cheap funding until January 2015, an additional 12 months from the original end date of January 2014.

Adjustments have been made to the scheme to encourage greater lending to SMEs, following criticism the scheme has demonstrated a bias towards mortgages.

Initially, lenders could access £1 from the scheme for every pound of additional real economy lending they advance.

For the remainder of 2013, every £1 of net lending to SMEs will be worth £10 of cheap funding in 2014. In the year to the end of January 2015, lenders will be able to draw £5 from the scheme for every £1 of net lending to SMEs in 2014. 

As is currently the case, lenders will have £1 of access to cheap funding for every £1 in net lending to mortgage borrowers until January 2015.

Chancellor George Osborne says: “The Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses. This innovative extension will now do even more for small and medium-sized businesses so they can play their full part in creating new jobs.”

Given the impression the FLS has previously been too heavily skewed towards mortgages, is there anything to suggest the newly restructured scheme will do much to further strengthen the mortgage market?

Where the FLS has had the most noticeable impact has been on mortgage rates. Since it launched in August, rates on certain products have dropped to record lows.

Chelsea Building Society recently launched a 1.99 per cent three-year fix and also offers a market-leading 1.74 per cent two-year fixed rate.

In a stark reminder of just how much rates have fallen since the onset of the FLS, Tesco recently relaunched its 1.99 per cent two-year fix, which represented the lowest ever fixed rate when it first came to market in October.

Abbey, HSBC and Yorkshire Building Society have all followed suit with their own two-year fixed rates at between 1.79 and 1.99 per cent.

Council of Mortgage Lenders director general Paul Smee says the most obvious benefit the scheme’s extension represents to the market is that rates like this will be around for longer.

He says: “This will minimise the risk of disruption to lending flows that might arise in anticipation of the closure of the scheme.”

IMLA executive director Peter Williams says it may also encourage more lenders to sign up.

He says: “Lenders would have started to turn the tap off soon and giving another year is a further incentive for other lenders who are not in it to sign up.”

Potential house purchasers who are perhaps holding out for even better deals may be disappointed as the consensus from the industry is that lenders are unlikely to keep dropping their rates further.

Williams says: “The major price cuts are behind us. I would not expect to see much more in terms of rate cutting.”

There are tentative hopes the extension will instead encourage lenders to be less stringent with lending and improve overall consumer access to riskier products.

E.surv chartered surveyors director Richard Sexton says: “Although mortgage rates are at record lows and mortgage lending has improved, criteria to access high LTV mortgages are still very tight, deposit requirements for affordable mortgages are still very high and first-time buyer lending is still very low by past standards.

“With any luck, lenders will use the cheaper funds to ease mortgage criteria and lower deposit requirements.”

Notably absent from the announcement is direct access for non-bank lenders to the scheme. Non-bank lenders have long argued in favour of access to cheaper funding in order to stimulate competition and level the playing field with the big lenders.

While non-banks will not have direct access, banks which lend to non-banks will now be able to count that money towards how much they can borrow under the scheme.

Paragon Mortgage managing director John Heron says: “We are encouraged that, to a degree, this concern has been recognised and the Bank has provided some measure of support by providing a route for those banks that have access effectively to conduit funds to non-banks. However, the devil is often in the detail and we have not seen it yet. This makes it hard to be clear on how helpful this may be.”

Where the scheme could have a significant impact on the property market is through buy-to-let landlords. As long as they have an annual turnover of less than £25m, landlords can be classed as SMEs, so lenders that advance business loans to them will able to access additional funding through the FLS.

Landlords’ ability to secure mortgage lending will not be directly affected by the changes to the scheme, but it offers a greater incentive to lenders to advance loans to them.

The Buy to Let Business managing director Ying Tan says this additional capital will indirectly impact on BTL mortgage rates.

He says: “This is very positive news for BTL brokers. There will be more cash around which will drive demand among landlords. The pace of supply will obviously need to be ramped up which will drive down rates.”



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