Bank of England to end Funding for Lending Scheme for mortgages

Mortgage and savings rates could be about to rise thanks to the Bank of England's plan to rein in the Funding for Lending Scheme for home loans.

The Bank of England has announced that from January the Funding for Lending Scheme will no longer provide funding for mortgages.

Instead it will be more focused on business lending.

The Funding for Lending Scheme was launched in July 2012 and was designed to provide banks and building societies with access to cheap funding, so long as that money was used to provide loans to businesses and individuals. It has been a major factor in the record low mortgage rates we have seen in recent months, though it has also forced savings rates down as lenders are no longer reliant on attracting deposits to fund their loans.

The Funding for Lending Scheme was originally due to finish in January 2014, though it was extended for a further 12 months in April.

But now the housing market has shown signs of improving, Mark Carney, the Governor of the Bank of England, has said it is no longer necessary and announced mortgage funding will be pulled early.

Mr Carney said if the funding of the scheme were to remain focused on helping reduce mortgage interest rates, this could result in an overheated housing market which would be a danger to the economy.  

He also confirmed that these changes would have no effect on the Government’s Help to Buy scheme.

"The changes announced today refocus the Funding for Lending Scheme where it is most needed – to underpin the supply of credit to small businesses over the next year – without providing further broad support to household lending that is no longer needed," Mr Carney added.

Details about how the money will be refocused have yet to be announced, but as mortgage providers will no longer be able to access cheaper loans it seems likely they will push up interest rates to make up for the shortfall.

As a result, if you have been considering switching your mortgage now seems a good time to consider your options. It's doubtful whether we will ever see long-term fixed rates at such a low level again.

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Business lending

Credit conditions for small businesses are not improving as quickly as the Government had liked.

Banks will still be able to take £5 from the scheme for every £1 of net lending to small and medium enterprises (SMEs). The fee for all borrowing from the scheme will be set at 25 basis points, which should mean that SME loans remain cheap.

Savings rates

When the funding is redistributed in January, we may start to see savings providers start to raise interest rates, as they will once again need to make use of deposits to fund mortgages.

Over the last 18 months savings rates have been eroded, leaving savers with very few options for earning interest on their cash.

Right now the best rate of interest available is from Leeds Building Society at 4% but this comes with a hefty catch as the account is fixed for ten years. If you go for a shorter account the rates are significantly lower, with the best one-year fixed-rate account currently at 1.95% offered by Shawbrook Bank.

Little wonder that many have looked to alternatives to get a return on their cash. Read TrustBuddy: peer-to-peer lender offering 12% returns opens up to UK investors for one example.

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Double-edged sword

The Funding for Lending Scheme has been both a blessing and a curse during the past 18 months as it has relieved householders from expensive mortgage payments but also dampened interest rates on savings accounts.

Focusing it exclusively on business loans should be a positive for savers as they may finally be able to start gaining interest on their cash. Only time will tell.

What do you think? Has the Funding for Lending Scheme been a positive? Will this adjustment lead to rising interest rates on both mortgages and savings accounts? Let us know your thoughts in the comments box below.

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