Mortgages  

Treasury seeks to calm ‘bubble’ fears as it curtails scheme

Banks will no longer be able to call on the government’s coffers for cheap funding to underpin mortgage issuance from the start of 2014, as the Treasury seeks to calm fears of a housing market ‘bubble’.

In a statement issued today (28 November), the Bank of England and HM Treasury admitted although the growth in household loan volumes remains modest, activity in the housing market is picking up and “house price inflation” appears to be gaining momentum.

As a result, the government has decided there is no longer a need for the Funding for Lending Scheme, which offers lenders cheap financing from Bank of England that they can pass on in the form of increased issuance to borrowers, to provide “further broad support to household lending”.

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The Funding for Lending scheme will still be available until January 2015 for loans for businesses.

In a statement the Treasury and Bank stated the changes have no implications for the government’s Help to Buy scheme, which is designed to address the specific issue of access to mortgages for borrowers without large deposits.

Help to Buy has stoked fears of a housing bubble, with experts citing a lack of supply of new housing as responsible for sharp rises in house prices that is pricing many out of the market. Recent research has suggested that house prices have reached their highest level for a decade.

Both the Bank of England and HM Treasury used the end of the scheme for mortgages to claim FLS had “boosted the economy” - despite their own statistics throwing this claim into doubt.

Government statistics published back in September showed despite almost £18bn being drawn from the scheme, net lending by scheme members was more than £2bn down overall. The second quarter of 2013 was the only quarter in which growth has been recorded in the four that had passed since FLS was launched.

Mark Carney, governor of the Bank of England, said: “Over the past year the Funding for Lending Scheme has contributed to the recovery by helping to significantly improve credit conditions, especially for households.

“The changes announced today refocus the FLS where it is most needed – to underpin the supply of credit to small businesses over the next year – without providing further broad support to household lending that is no longer needed.”

George Osborne, chancellor, said: “The Funding for Lending Scheme proved to be a successful tool in supporting the recovery. Now that the housing market is starting to pick up, it is right that we focus the scheme’s firepower on small businesses.

“Small firms are the lifeblood of our economy. That is why we are reforming the banks, introducing the employment allowance and now focussing the Funding for Lending Scheme to support them.”