Funding for Lending scheme already leading to cheaper mortgages

The Funding for Lending scheme has seen its first big win, with RBS chopping mortgage rates for first-time buyers.

The Funding for Lending scheme, announced in June, is meant to encourage lenders to offer more mortgages at better rates, and it looks like its already working.

The Royal Bank of Scotland (RBS) is the first off the blocks to announce lower rate deals as direct result of accessing cheap funds from the Bank of England through the scheme.

The nationalised bank has chopped mortgage rates significantly for first-time buyers, through its NatWest and RBS brands, and some of the new deals are targeted directly at those who can’t muster a large deposit.

The deals include:

• A fee-free 4.79% five-year fixed rate for first-time buyers borrowing up to 90% of the property’s value
• A fee-free 4.79% five-year fixed rate for buyers of new-build properties through the Government’s NewBuy scheme, up to 95% of the property’s value
• A 3.49% two-year tracker or two-year fixed rate for new buy-to-let borrowers with a 40% deposit, with a fee of £1,999.

Are they any good?

Yes, the deals are very competitive. The five-year fee-free fix at 4.79% up to 90% of the property’s value is a best buy.

First Direct offers the closest match at 4.99% fee-free, and Norwich & Peterborough has a slightly cheaper rate of 4.69%, but you will need to scrape together an extra 5% deposit and pay a fee of £295 for that deal.

The five-year fixed rate NewBuy mortgage beats other NewBuy mortgages hands down over the same period.

The buy-to-let tracker and fixed deals are also up there with the cheapest rates available. The lender explains that landlords are helping to boost the housing market,and has suggested that by cutting rates like this, landlords may be able to reduce rents.

But some may question if it is really the best use of the scheme’s funds to help landlords with massive 40% deposits access cheap mortgage finance?

What exactly is Funding for Lending?

Chancellor George Osborne announced the new Funding for Lending Scheme during his Mansion House speech in June, but details were woolly.

We now have more information about how it works:

The available funds from the Bank of England total an expected £80 billion over the next 18 months, though there is no cap, and the lenders will have up to four years to pay it back. That’s a significant boost to a market which is currently only about £135 billion of gross lending a year.

We have also found out that lenders that increase their lending volumes will benefit from cheaper borrowing rates than those that don’t – an added incentive to kick-start the mortgage market. Those that increase lending will be able to borrow from just 0.25% up to 1% interest - this is far, far lower than they could access elsewhere.

And that’s the main intention of Funding for Lending, to reduce funding costs for banks. The wider aim is to boost spending in the economy, by allowing families to purchase homes, as well as helping small firms to invest in their business.

The Bank of England believes that the cheap funds will encourage banks to increase lending, and lower interest rates.

But are they being over optimistic?

Will we see more rate cuts?

It’s great to see RBS announce that it has cut rates as a direct result of the scheme, although one major lender has already said it won’t use Funding for Lending.

HSBC, which has this week claimed to have lent to a third of all direct first-time buyers this year, reckons that it already has solid funding streams and does not need to borrow from the Bank of England.

It has pledged to lend an extra £2 billion on top of its projected £15 billion for 2012, meaning it will now lend £17 billion in total, £4 billion of which will be to first-time buyers.

Some of the other big banks, such as Santander, have already admitted that they plan to reduce their market share in mortgage lending.

Seen it all before?

The Funding for Lending scheme may be new, but it isn’t a million miles away from the other initiatives announced by the Government over the last few years to get lenders to start lending again - to households and to small businesses.

These include the Special Liquidity Scheme, Project Merlin and the National Loan Guarantee Scheme. Lending hasn’t exactly soared as a result of any of them – mortgage lending is still about half as pre-crunch levels.

Of course, there is also the problem that lenders still want to target their lending to low-risk mortgage borrowers rather than high-risk, first-time buyers with small deposits and, frankly, these borrowers are already befitting from great deals.

Lastly, some argue that there isn’t actually a huge demand for extra borrowing, from those wanting to get on the ladder, or small businesses. Fear of job losses and a lack of consumer demand are stifling the desire and confidence to borrow, as much as high funding costs and regulatory requirements are stifling the supply.

Of course, doing something is better than doing nothing, and even if the Funding for Lending scheme simply stops lending volumes from falling further, it will be helpful.

Hopefully it will achieve more than that, and we will see more lenders come forward with lower mortgage rates targeted squarely at those potential borrowers who really need affordable mortgage finance.

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This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

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