Last updated: January 30, 2013 5:20 pm

Mortgage lending conditions improve

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Further signs emerged on Wednesday that the Funding for Lending Scheme, the government’s latest flagship initiative to spur credit creation, was improving borrowing conditions in the mortgage market.

Bank of England figures suggested that the FLS, launched by the Treasury and the BoE in August to encourage lending to businesses and households, was having a favourable impact on the housing market.

But lending conditions for smaller businesses remain tough and banks have yet to pass on the bulk of their lower funding costs to companies and households.

The BoE’s trends in lending data showed the number of mortgages approved rose by more than expected to 55,800 in December – the highest level since January 2012 but still less than half the pre-economic crisis figure.

The cost of mortgage borrowing also fell, according to the BoE data, with the average rate of interest charged dipping to 3.65 per cent – the lowest level since March 2012. The cost of household borrowing that was not secured on property also fell.

The mortgage lending data are in line with the BoE’s quarterly survey on credit conditions, in which lenders polled by the central bank suggested there had been a “significant” easing in the cost and availability of home loans in the three months to mid-December.

The Council of Mortgage Lenders, a trade body for banks and building societies, has predicted a revival in mortgage market activity this year, in part because of the FLS.

Melanie Bowler, economist at Moody’s Analytics, said: “UK credit conditions are slowly starting to loosen. Secured lending is the key driver behind the improvement and will remain so throughout 2013.”

Borrowing costs could fall further in the months ahead.

Funding costs for UK lenders have plunged since the summer, aided by an easing of the eurozone crisis and the introduction of the FLS, which works by offering banks a source of cheap longer-term loans. However, banks have yet to reduce their interest rate charges by the same margin.

Small businesses continue to struggle to borrow cheaply. The average interest rate charged to businesses borrowing less than £1m – which tend to be smaller companies – rose to 3.65 per cent in December, up from 3.39 per cent the previous month. However, the BoE expects the FLS to take longer to benefit businesses, which usually take longer to agree the terms of borrowing arrangements.

The cost of borrowing for larger businesses dipped, with the average interest rate charged on a loan of more than £20m falling from 2.4 per cent in November to 2.37 per cent last month.

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