Funding for Lending Scheme – is it working?

Like every initiative we have seen since the dreaded ‘credit crunch’, the Funding for Lending Scheme has advantages and disadvantages. What we explore in this article, it why it is already working – and also what can be done to improve it. The scheme has had mixed reviews, with newspapers such as the Guardian trying to find the negatives; and of course, some spokes people for Bridging Lenders also slating it as they cannot apply for the funds. But the evidence that it has had impact is undeniable.

The basics of the Funding for Lenders scheme

In July 2012 the government announced a new and innovative way to get Lenders lending – to give them money to lend! We’ve heard that before, is what I can hear you say. However, there is a little entrepreneurial spirit to the scheme. When lenders subscribe to the scheme they agree to pay the Bank of England a two tier set of interest rates, a lower interest rate if they prove they have leant the money relatively quickly to mortgage borrowers and small businesses, but a higher rate if they have held onto it. Some reports suggest these sums are 0.75% interest on the money; however, if they have not lent that money in a relatively short period of time the interest rate increases to 2.75%. This is a major incentive for the banks to actually lend the money to end users.

The latest reports show that 30 or so lenders have applied for the scheme, while some still wait for approval, the money is already filtering through and being leant. Nationwide have reported their share of the funds as £509m and they have also stated that this extra funding has facilitated them reducing the interest rate to borrowers, so as a result, better deals are available.

We have also seen a price war start, with lenders reducing rates and some, such as Santander bringing back their popular 7 day limited sales, whereby they set a strict deadline for applications to be submitted in order to benefit from a preferential rate. There has also been raft of rate reductions in the BTL mortgage field, from lenders such as BM Solutions and Woolwich / Barclays.

It is great to see that this money has filtered through to the lenders quickly – especially considering the rad tape associated to it. If you think about how slow government has been in the past, to see evidence that money is being leant already is a good sign although there is more to do.

Government announced £80bn of funds to be available through the scheme. That is a good start, but £80bn does not go far in mortgage and business lending terms. That tranche of funding will soon run out. It is a good plan, written well and helping home-owners and business alike, but let’s hope there is another tranche of funding once the £80bn has run out. Easy to say as a mortgage broker, easy to want as a home-owner or business, maybe not so easy to do with restricted funds as a government – but lets see what happens next.

How is Funding for Lenders working?

What is evident is that it has created a price war between lenders and the ‘deal’ rates available to mortgage borrowers have reduced. We have also seen Lloyds TSB and RBS actively advertising to attract applications from viable businesses looking for funding. Now is a great time to apply for funding, whether for business or mortgages. Businesses will need a good business plan to demonstrate what they money will do for the business. As for the residential/retail market, applications still need to be robust.

But what the Funding for Lending scheme has not done at this stage is shift lender criteria sufficiently enough. In other words the lenders are making the money available to those who could already borrow, but at a cheaper price. Saying that, Kensington have come back to the market with a seeming eagerness to lend and they will accept applications from mortgage borrowers who have had the odd blip in their credit history. Also, on the business lending front, having more funds to distribute should make more business eligible for a loan. What could really improve the industry is for criteria to move, even just a touch more, to make more people able to meet the lender criteria. On the flip side to this, the £80bn would be snapped up in no time at all if this was the case.  We don’t need lax lending, but just some movement to make mortgages and business loans more accessible to those with the odd financial blip. This would bring more people to market rather than let those already in the market access cheaper borrowing.

In Conclusion 

It is evident that Funding for Lending has certainly made an impact on the market. It is a great idea – but like any great idea needs a little tweaking to make it really work. It also needs more funds, as £80bn will be gone in no time. Above all, don’t slate the government for this plan, encourage them to expand it. Because this is a good idea, that with expansion, could really have a positive impact on the market.

To discuss your mortgage requirements, please contact one of the team at Harvey Bowes on 029 2115 6918.


About harveybowes
Mortgage Broker and founding Director of Harvey Bowes Limited. A mortgage broking practice with bases in Cardiff & Poole, UK. We take a fresh and positive approach to mortgage broking which pays dividends for both our clients and frankly, ourselves. The team at Harvey Bowes are expert advisors in all aspects of mortgages from residential to commercial and buy to let.

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