The Bank of England is to stop providing cheap finance for home loans amid growing concerns about the pace of house price growth. Experts said that mortgage rates were likely to rise in the medium term, while savers should benefit from higher deposit rates.
The BoE’s Financial Policy Committee also warned that it could require banks to test borrowers’ ability to withstand larger interest rate rises than they currently do, and unveiled an arsenal of possible tools to calm the housing market.
“Activity in the housing market is picking up and house price inflation appears to be gaining momentum. As a result there is no longer a need for the FLS to provide further broad support to household lending,” the Bank said.
House prices rose 6.5 per cent in the year to November, according to the Nationwide house price index – the highest rate of growth since July 2010. Mortgage approvals are up 34 per cent to their highest level since March 2008.
One senior policy maker said: “The BoE no longer wants to put its name to devices that stimulate the mortgage market.”
Funding for Lending was launched in July 2012 and has been widely credited with bringing down rates and increasing mortgage lending volumes. It was expected to run until January 2015, but the provision of government finance for household lending will now be considerably reduced.
The scheme offered lenders a funding allowance which began at 5 per cent of their loan book, and increased with their net lending. Thursday’s announcement represents an end to the process of building up the allowance by lending to households, but some lenders will still be able to access cheaper funding from the government.
The allowance built up through lending in the last three quarters of 2013 can still be claimed until January 31 2015, when the whole scheme ends. However, lending to households from January 2014 onwards will cease to contribute to this allowance, and the initial 5 per cent will no longer be available.
Cheap funding through FLS has had a marked impact on rates. According to Bank of England data, the interest rate on two-year fixed-rate mortgages for those with a 10 per cent deposit has fallen from 5.6 per cent to 4.4 per cent over the past 12 months.
“Before FLS if you had a 10 per cent deposit there weren’t a huge amount of options. Now it’s quite common to get a 10 per cent deposit mortgage below 4 per cent,” said Aaron Strutt, a mortgage broker at Trinity Financial Group.
Thirty high street lenders now offer mortgages with rates below 2 per cent. Barclays will lend between £500,000 and £2m at only 1.79 per cent.
FLS will continue to support lending to small businesses, where growth has been much slower. Until the end of 2014, for every increased pound of net lending, lenders will gain access to £5 of cheaper funding.
Mortgage brokers said the early end of the scheme would increase the cost of funds for lenders which would eventually feed through into interest rates
“We might not see a complete reversal, but I think as the months go by, we may see a gentle drift upwards for interest rates,” David Hollingworth, a broker at London & Country, said.
Aside from government funds, the other main sources of finance for mortgage lending are wholesale markets and retail deposits. Rates in the savings market are expected to inch upwards as banks are forced to compete more aggressively for savers’ money.
“Banks will now be looking for extra funds, and therefore savings rates should increase particularly in the long term fixed rate market,” said Charlotte Nelson at Moneyfacts.
The BoE also emphasised the range of tools at its disposal to combat future risk in the housing market, which include making recommendations on bank capital requirements for residential real estate lending, recommendations on maximum loan-to-value (LTV) ratios and recommendations to the Treasury regarding Help to Buy. LTV limits were considered by the Financial Services Authority as part of the Mortgage Market Review, but rejected.
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