Government’s attempt to inject £80bn into the economy through increased mortgage lending and small business loans fails to convince experts
The government’s £80bn scheme to kickstart the economy by encouraging more lending to homebuyers and businesses has launched, but experts have warned the new cash may not reach those who need it the most.
The Funding for Lending scheme, which was announced in June, will offer cut-price loans to banks and building societies who will be expected to make the money available through mortgages to homebuyers and loans to small businesses.
The money will be lent by the Bank of England for a period of up to four years at a cost of just 0.25% a year (below market rate), but banks or building societies whose lending declines between now and the end of 2013 will be charged more. The rate on the loan will rise by 0.25% for every 1% fall in lending to a maximum of 1.5%.
The BoE said the scheme was designed to “incentivise banks and building societies to boost their lending to UK households and non-financial companies”.
These are areas that have been particularly damaged by the credit squeeze and problems in the eurozone, with lenders scaling back loans and dramatically tightening lending criteria. In the BoE’s most recent Credit Conditions survey of banks, many predicted they would become more reluctant to lend in the coming months, and Santander recently said it planned to reduce mortgage lending.
The scheme has already prompted cuts in mortgage rates as lenders factor in the scheme. On loans for homebuyers with just 10% to put down as a deposit, Royal Bank of Scotland has cut its five-year fixed-rate to 4.79%, while First Direct has dropped its two-year fixed-rate deal to 4.29%.
There has also been a flurry of price cutting on deals aimed at those with much larger deposits. Nationwide building society has become the latest to reduce rates on a loan for borrowers with a deposit of at least 40%, introducing a four-year fixed-rate at 2.89%.
However, not everyone is convinced the scheme will lead to a big increase in new lending for those who need it most. Andrew Montlake, director of mortgage broker Coreco, said that while cheaper deals at low loan-to-values (LTVs) should be welcomed, individual banks and building societies could take advantage of the scheme without actually increasing their lending.
In addition, there was no incentive for them not to target the money at borrowers who were already well catered for.
“[Money] needs to be channelled towards those who are finding it difficult to obtain mortgages, such as first-time buyers with smaller deposits, rather than further swamping the 60% LTV and below market, where there is no problem obtaining finance,” he said.
“It is all very well having cheaper products, but lenders’ risk departments need to also loosen the rein and engage in sensible lending strategies.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, said targeting those with 40% deposits would not lead to a big increase in lending.
“While lenders may not be forced to lend at high LTVs under the rules of the scheme, if they don’t they may struggle to do enough lending to qualify for the cheapest fee to borrow via the scheme,” he said.
“While lenders might be happy to offer more choice at 75% and 80% LTV, it remains to be seen whether the same will be true at 90%. But without this we won’t get the kickstart that the housing market so desperately needs.”
John Walker, national chairman of the Federation of Small Businesses, said his organisation would be watching carefully to see that the scheme increased loans to businesses.
“The scheme is designed to help to make finance more affordable as well as easier to obtain. So it is vital the banks which take advantage of the scheme pass on these benefits to the small businesses it is intended for,” he said. “Over the last quarter, four in 10 small firms were refused credit.”