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Mortgage rates falling thanks to Funding for Lending scheme

The Bank of England says that mortgage rates have fallen following the introduction of the government’s Funding for Lending (FLS) scheme last year. Mortgage lenders have to borrow money themselves to fund mortgages, so the less they have to pay to borrow the lower the interest rates they need to charge to home-buyers.

The FLS aims to encourage more lending to the UK economy than would have been the case in the absence of the Scheme. It creates incentives for banks and building societies to boost their lending by reducing their own funding costs, which allows them to reduce the price of new loans and therefore increase net lending.

Many Building Societies are using FLS to fund increased mortgage lending

Participants in FLS include not only the major high street banks and their mortgage-lending subsidiaries, but also the many Building Societies which still provide a major source of finance for home-buyers.

Net lending by the 40 groups participating in the scheme declined slightly by £0. 3 billion during the first quarter of this year (to 31 March), which looks disappointing. However the Bank says that prior to the launch of the FLS in July 2012, it was judged that UK bank lending was more likely to decline than increase over the subsequent 18 months. So FLS appears to have reduced the decline, but not altogether.

The Bank also points out that it will take time for the improvement in credit conditions to feed through to lending volumes, given the typical lags involved in the loan application, approval and drawdown process.  

They expect net lending to pick up and become modestly positive over the remainder of the year. Recent figures indicate that there has been an increase in the number of mortgage applications since the end of March, with more activity in the housing market.

Mortgages now easier to obtain

Mortgages have been somewhat easier to obtain in the last few months, as lenders are able to obtain funds at cheaper rates. Easier deposit requirements have allowed more creditworthy households to move home or buy for the first time. Higher loan-to-value (LTV) mortgages are also now being offered, which can help those with a lower cash deposit.  

The Council of Mortgage Lenders (CML) reports that the most visible sign of things getting better is the modest revival in the number of first-time buyers. Their figures indicate that there were 218, 000 first-time buyers in 2012, the best since 2007.  

However the CML says that many would-be homebuyers still need to borrow from the ‘Bank of Mum and Dad’ in order to get a foot on the housing ladder. They estimate that last year only 36% of first-time buyers got on to the housing ladder under their own steam. This contrasts with well over 60% before the credit crunch, when deposit requirements were more modest.

Home ownership still an aspiration for most people

It seems that plenty of people still want to buy their own home. A survey undertaken by YouGov shows that home-ownership is still the long-term tenure of choice for most people around the country.  

In London, half of all adults surveyed indicated a preference to buy a new home in the next two to three years. Despite the more challenging conditions for buyers in the capital, a larger proportion of adults in London had aspirations for home-ownership in the short term than in the UK overall.

So while FLS does seem to be helping, it is clear that there is still a large un-met demand for more mortgage lending. Part of the problem is that while house prices have fallen to some extent, average incomes have not increased to enable people, especially younger buyers, to be able to afford mortgage repayments. This problem is worse in the London area, where house prices continue to increase.

Sir Mervyn King, the Governor of the Bank of England, has recently warned against the dangers of government-backed mortgage guarantees which lead to the collapse of banks in America. However the government is clearly trying to take action to lift the housing market. The recent announcement that FLS is to be extended to the end of January 2015 is encouraging news.  

Potential homebuyers should do their best to try and buy now. While mortgage rates remain as low as they have ever been, there are signs that house prices, especially in some parts of the country, are now starting to pick up. There are no doubt some good buys to be had, but sellers may be less willing to take a price-cut in order to sell.

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