Will new bank lending scheme help home buyers?

Against a grim economic backdrop of a shrinking manufacturing sector and a double-dip recession, the government on Tuesday launched the funding for lending scheme (FLS).

The Treasury and Bank of England hope that the £80bn initiative will encourage banks to lend to small businesses and prospective home owners, both of whom have been unable to access affordable credit. Commercial banks will be able to borrow money at a rate of around 0.25 per cent a year, but this funding will be linked to banks’ lending: if lending to customers declines between now and the end of 2013, the bank will be charged more, adding 0.25 per cent for each 1 per cent fall in its lending, up to a maximum fee of 1.5 per cent.

The FLS is launched as the Nationwide building society said that house prices had suffered the biggest year-on-year decline in almost three years – a fall of 2.6 per cent last year, to an average of £164,389. UK house prices are 13 per cent below their 2007 peak, and although the building society pointed out that the UK market had shown “resilience” compared to other countries, it reflects a stagnant housing market.

More competitive mortgages?

In its introduction to the FLS, the Bank of England said: “Easier access to cheaper bank borrowing should boost spending in the economy, for example by allowing families to purchase homes, or by allowing firms to finance investment in new and productive enterprises. In turn, higher spending should create jobs and raise incomes.”

Whether these things in isolation will improve things remains to be seen – consumers are still uncertain. Consumer confidence is a massive indicator as to whether the economic situation will improve. Kevin Mountford, Moneysupermarket.com

A number of mortgage lenders have lowered their rates in the past few weeks, presumably in anticipation of the FLS. NatWest, HSBC, Santander, and more recently Nationwide, have cut their mortgage rates to below 3 per cent for new, four or five-year, fixed-rate deals.

40 per cent deposit

However these reduced rates have so far only been made available to those homeowners with a large deposit of at least 40 per cent. “The latest figures from mortgage lenders suggest that they’re offering better mortgages to people who could afford one anyway,” Jonathan Portes, director of the National Institute of Economic and Social Research told Channel 4 News. “It’s not clear that it will subsidise people who couldn’t afford one now.”

For first-time buyers without a big deposit, the current outlook is bleak. The latest British Bankers’ Association research found that mortgage approvals slumped to their lowest number in at least 15 years in June.

Read more: a closer look at the NewBuy scheme for first-time buyers without a big deposit

Experts cautioned that the scheme would not address a wider lack of consumer confidence.

“If nothing else, it acts as a catalyst. It’s starting to invigorate lines of credit,” Kevin Mountford, head of banking at Moneysupermarket.com told Channel 4 News. “But whether these things in isolation will improve things remains to be said – consumers are still uncertain. Consumer confidence is a massive indicator as to whether the economic situation will improve.”

Another concern is that banks are not obliged to pass on lower interest rates to their customers, even though this is the government’s aim. “Let’s hope that we see interest rates coming down, and that the banks are not sneaky about putting up fees,” added Mr Mountford. “The FLS means that the government is subsidising the borrowing rate for the banks. They [the banks] have to make sure that is reflected in the customer rates that they offer.”

Nationwide’s house price index for July 2012
– 9 out of 13 UK regions saw annual price falls in Q2
– North/south divide persists for English house price performance
– Northern Ireland continues to see largest price falls
– Average house price: £164,389

Papering over the cracks?

The FLS will supersede the £20bn national loan guarantee scheme, known as credit easing, which was unveiled in March as a flagship policy to boost lending to businesses, and which Chancellor George Osborne said just last month that he was extending.

“Despite promises from ministers, net lending to businesses has fallen in every month of this government,” said Shadow Treasury Minister Chris Leslie. “And there are serious questions about whether the new funding for lending scheme will really see lending to businesses become cheaper and easier to access.”

The scheme’s critics suggest it is an attempt to paper over the cracks of an economy subject to much wider factors, including a worsening eurozone crisis. And Mr Portes told Channel 4 News that schemes to encourage lending did not have a good record so far.

“In the medium to long term, the problem with the UK housing market is that we should be building more houses,” he added. “On the finance side, we have to recognise there are fundamental problems with the UK banking sector that this won’t solve.”