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Will funding for lending hit the right targets?

Samuel Dale reports on whether the funding for lending scheme will hit the right borrowers and boost the housing market.

Treasury 480

Concern is growing that lenders will use cheap money from the Government’s funding for lending scheme to cut rates for existing mortgage borrowers rather than encourage would-be home owners to buy a property.

Funding for lending officially opened last week. It gives banks access to cheap Bank of England loans for 18 months to pass on in the form of mortgages and small business loans.

The Bank is aiming for a 5 per cent uplift in lending, which would amount to about £80bn worth of loans over four years.

Nationwide, Royal Bank of Scotland, Lloyds Banking Group and Santander are taking part in the scheme, while HSBC will continue to use retail deposit funding.

Since details of the scheme were unveiled on 13 July, lenders have been engaged in a price war over 60 per cent loan-to-value five-year fixed rates, which are typically the preserve of existing borrowers.

HSBC fired the starting pistol with the lowest-ever five-year fix at 2.99 per cent, quickly followed by Santander, NatWest and Nationwide with sub-3 per cent rates on 60 per cent LTV long-term fixes.

Announcing the scheme in his Mansion House speech on 14 June, chancellor George Osborne said it would make loans cheaper and more accessible for businesses that want to expand and for aspiring home owners.

But only RBS has explicitly cited the scheme as the reason for drastically cutting a 90 per cent LTV deal from 6.49 per cent to 4.79 per cent.

RBS also used the scheme to launch cheaper buy-to-let deals, saying it could help cut rents and subsequently help people onto the housing ladder.

Last week, Santander cut some of its 95 per cent NewBuy rates by 0.7 per cent, but the lender says the move is unrelated to the cheap flow of money from the Bank of England.

National Institute of Economic and Social Research director Jonathan Portes says firms have no obligation to lend to specific types of borrower.

He says: “There is nothing forcing them to lend to first-time buyers rather than people who can afford to get a mortgage anyway.

“Whether the scheme will generate new additional lending to households or firms that would not otherwise have got the money is clearly a significant issue. On an aggregate level it is far from clear whether it will achieve those objectives.”

Capital Economics chief property economist Ed Stansfield agrees the early signs are not encouraging.

He says: “If lenders were approaching this with an objective of widening the net then you would see rates for mortgages with lower deposits coming down too. But it may be that lenders are simply getting to grips with the scheme and this is just a starting point.”

Stansfield says borrower demand is as big a problem as funding and expectations for the scheme are to simply maintain current lending levels rather than provide a boost.

Lentune Mortgage Consultancy director Stuart Gregory says it will only take one or two lenders to drop their rates at higher LTVs to spark competition.

He says: “If there are a few cases where lenders cut rates at, say, 85 per cent LTV, then it will encourage more first-time buyers to take the step.

“The schemes the Government has tried this year have been positive and I cannot knock it for attempting to do something. It could prove to be positive but it needs participation from lenders.”

Gregory suggests rate cuts could be down to lenders pushing for market share in the second half of the year as they realise they have not done enough lending.

Mortgage industry consultant Mehrdad Yousefi agrees there may be other factors behind recent rate cuts apart from the funding for lending scheme.

He says: “Another element is the fall in swap rates because of continued nervousness around the global economy and the eurozone in particular.

“Along with funding for lending, it has combined to see the cost of capital come down sharply on fixed rates. There is a question mark about whether demand is high enough so banks are discriminating by making loans cheaper for those who can get them.”

Funding for lending is the latest in a long line of Government schemes designed to boost the housing market, including FirstBuy and NewBuy, both aimed at first-time buyers.

The latest plan also targets loans to small and medium-sized businesses and is effectively replacing the National Loan Guarantee Scheme, the credit easing scheme unveiled by Osborne last October. The Treasury says the NLGS is no longer economically viable for banks.

Labour says the scheme has flopped, with only £2.5bn of loans made last year compared to targets of £20bn. Shadow financial secretary to the Treasury Chris Leslie says there are also serious questions about whether funding for lending will work for businesses.

He says: “As the recession has worsened, the chancellor has begun to panic, which explains his emergency call to the Bank of England to set up funding for lending.

“Our concern about funding for lending is that it is not targeted at small and medium enterprises. It comes after a series of other failed initiatives to re-start the economy. Project Merlin was a flop. Credit easing was strangled at birth. I really hope this latest scheme works but the Government is hardly filling anyone with confidence.”

Portes says shelving the NLGS is a clear recognition that it did not work as hoped, and that it does not bode well for future programmes.

He says: “There have been a number of schemes designed to boost bank lending to the private sector and so far they have not achieved their objectives. One hopes funding for lending will do better, but the experience so far suggests one should be sceptical until it is delivered.”

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