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Will cuts in Funding for Lending (FLS) affect mortgages?

Will mortgages be harder to get, or more expensive, now that the lending for residential loans is to be removed from the government-backed Funding for Lending scheme? 

That is the question which now faces prospective house-buyers.

Funding for Lending (FLS) was introduced last year, providing cheap central bank funding to banks and building societies to enable them to pass on cheap loans to homebuyers. The scheme was also intended to boost lending to commercial borrowers, in order to boost the economy generally.  

It seems that the Bank of England is worried that the rise in house prices over the last few months is leading to a bubble. In an attempt to dampen the market it has decided to take swift action by announcing that lenders will no longer be able to borrow funds under FLS to lend on mortgages for house purchases. Instead, funds are just to be concentrated on the commercial sector.

At first sight this looks as if it could reduce the amount of money which mortgage lenders will have available to lend, and make it harder to get residential mortgages.  

Some commentators think that in order for lenders to obtain funds from other sources, they will have to pay higher interest rates to attract investors. This would lead to higher interest charges for borrowers and increased mortgage repayments.

Mortgage lenders do not foresee any problems 

The Council of Mortgage Lenders (CML) does not think there is much to worry about. Commenting on the Bank of England’s announcement yesterday the CML director-general Paul Smee observed

“Although the changes to the FLS may be a surprise, they are not a shock. Mortgage lenders are well equipped to meet their funding needs, as wholesale funding market conditions have improved and retail deposits are robust. “

As the CML’s members are the banks, building societies and other lenders who together undertake around 95% of all residential mortgage lending in the UK they should know what they are talking about.

Mortgage lending has always depended upon lending institutions being able to attract funds from investors. Over the last few years that has been harder but the strengthening housing market should now encourage new investment.  

Continued strength of housing market should attract new investors

One encouraging sign is that the number of defaults and repossessions has fallen consistently over the course of this year. Borrowers who were in a negative equity situation last year may now find that prices have recovered sufficiently to enable them to sell and repay the whole of the outstanding mortgage. So mortgage lending will now be seen as less of a risk than it has been for some time.

The Bank of England was also keen to point out that the changes they are making will have no implications for the Help to Buy scheme, which is designed to address the specific issue of access to mortgages for borrowers without large deposits, unlike the FLS which was designed to boost lending more generally.

Commenting on the housing market yesterday Mark Carney, the Governor of the Bank of England, said

“Risks to financial stability may grow if there are further substantial and rapid increases in house prices and a further build-up of household indebtedness. ”

Mr Carney added: “It is no longer appropriate to have our foot on the accelerator” and that it is necessary to keep the housing market on a “sustainable path” over the coming years.

Is Mr Carney shouting ‘slow down’ too soon?

One does wonder whether Mr Carney is rather like the nervous car passenger who shouts ‘slow down’ before the driver is even out of bottom gear. He does seem anxious to put the brakes on when the signs of recovery in the housing market are still uneven across the country. Homeowners in areas where prices are static or even still declining will question whether he is right to talk about “substantial and rapid increases in house prices” until they feel the benefit of any increase.  

If lenders can continue to attract investment without needing funds from FLS, and many lenders have not needed such help, there is no reason to suppose that mortgage lending will dry up. Whether interest rates will rise remains to be seen, but that is probably dependent upon what the Bank of England does about interest rates generally.

It appears that the change to FLS will not have much effect on the housing market, but time will tell.

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