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Will Funding for Lending boost the mortgage market?

Bank of England BoE Bank 480

Last week, the Bank of England revealed that 13 firms have signed up to the Funding for Lending Scheme but will the scheme succeed in boosting lending at lower rates?

In July, Bank of England governor Mervyn King announced that under the scheme, banks and building societies can exchange existing loans for Treasury bills, on which they will pay an interest rate of 0.25 per cent over the next 18 months. The Treasury hopes the scheme will encourage lenders to boost lending and cut rates on mortgages and small business loans.

Participating banks can borrow up to 5 per cent of their stock of existing lending. The Bank of England, together with the Treasury, estimated that based on the stock of existing loans in the UK at the launch of the scheme, eligible banks and building societies could borrow roughly £80bn.

The Bank’s first report into the scheme, published last week, shows the 13 banks and societies that have signed up represent 73 per cent of all lending in the UK. The 13 lenders include Aldemore, Barclays, Hinckley & Rugby BS, Ipswich BS, Kleinwort Benson, Leeds BS, Lloyds Banking Group, Monmouthshire BS, Nationwide BS, Principality BS, RBS Group, Santander and Virgin Money.

Based on the 5 per cent available to financial institutions of the £1.2trn on their lending books, participants will be able to collectively borrow closer to £60bn in cheaper credit.

Average mortgage rates have started to come down in the weeks since the scheme’s launch. Figures compiled by Moneyfacts.co.uk for Money Marketing’s sister publication Mortgage Strategy show that average rates on five-year fixed mortgages at 60 per cent LTV have fallen the furthest, down from 4.35 per cent in June to 3.79 per cent on 24 September.

At 95 per cent LTV, average rates were 0.09 per cent lower than at the beginning of June and stood at 5.61 per cent on 24 September.

LTV fixed rates at 100 per cent and 80 per cent remained unchanged, at 5.98 per cent and 4.71 per cent respectively.

The Bank published its quarterly Credit Conditions Survey last week, which found sentiment to be on the rise among lenders.

The last three months saw the largest increase in secured lending to households since the survey started in 2007. The forecast for the final quarter of 2012 is also positive, with UK lenders predicting an even greater increase in mortgage availability. The Funding for Lending Scheme was widely cited as contributing towards the expected improvement in secured credit availability.

Optimism for buy-to-let is also growing. While the survey revealed an overall negative response from lenders on the sector for the third quarter, it showed lenders have a positive outlook for the final three months of 2012.

The British Bankers’ Association noted last week that the value of mortgage approvals rose 10 per cent in August to hit £7.7bn, up from £7bn in July. It said while the Funding for Lending scheme will improve lending conditions over time, it is too early to effectively measure its impact so far.

London and Country head of communications David Hollingworth agrees. He says it is “impossible to tell” which improvements can be attributed to the scheme and which are a result of general market improvements.

He says: “Funding costs for lenders have probably fallen back anyway so it is quite hard to separate out how large an impact the scheme must have had but I am sure it contributed.

“I hope more lenders will join and that as it gathers pace, it will naturally feed through into not just the very low LTV markets but also the higher LTVs.”

Lloyds Banking Group director for intermediaries Mike Jones says the lender has drawn down an initial £1bn under the scheme.

He adds: “With the support of the Government’s Funding for Lending scheme, LBG committed to lending £500m of funding at even more competitive rates. In the first six months of the year alone, the group helped over 25,000 people take their first steps onto the property ladder and our pledge will help over 50,000 people buy their first home by the end of 2012.

A Barclays spokeswoman says the bank is not put off by the shortfall in the expected lending figures and remains positive on the impact the scheme is likely to have.

She says: “We have not been deterred by the results released by the Bank and we remain fully behind the Funding for Lending scheme.”

John Charcol senior technical director Ray Boulger says he believes lenders will borrow more than the £80bn estimate proposed by the Bank.

He says: “It is an elongated process and some of the smaller institutions will not have done securitisation before whereas the bigger banks will be used to it. Small lenders will therefore need longer before they can meet the Bank’s requirements and access the money.

“The early numbers are misleading if the assumption is that this represents the bulk of the lenders who are going to be interested. It is early days for the scheme. Other lenders will be coming on board in due course and the actual amount available will be more than £80bn.”

The Council for Mortgage Lenders is also positive on the long-term implications of the scheme, particularly when taken in context with the results from the Credit Conditions Survey.

CML spokesman Bernard Clark says: “What has emerged from the Credit Conditions Survey is encouraging and we need to understand the extent to which Funding for Lending has helped to deliver that outcome. We welcome the start the scheme has made and recognise that it has potential.”

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