New Government Funding for Lending – Are Banks Using the Money Correctly?

Written by Sam Jones on 06 October 2012.

Following our announcement on the new Government Funding Scheme for Lending, we indicated our concern that it may be interpreted by Banks as simply New Funds for Lenders and that any funds obtained through the scheme need to be targeted at the market the Government sought to help – first time buyers.

Interestingly research published this week by Moneyfacts Group shows relatively minor change in the number of first time buyer mortgages despite the Government's Funding for Lending Scheme (FLS) having been in operation for a good two months. Capital Fortune was clear that UK lenders should not treat the Scheme as Funding for “Lenders”, but rather Funding for “Lending.” The data produced so far however, is proving disappointing. It shows that in August 2012 there were 62 mortgages available at a 95% loan-to-value (LTV) and this has risen to just 69 despite the funding guarantees.

Sylvia Waycot, of Moneyfacts Group said: "The FLS is about making lending more accessible. The sad truth is that there are only seven more 95% mortgages available than before the scheme started. Even if you were to add together the additional 95% and 90% mortgages that first time buyers crave, they would still only amount to a paltry forty-four more choices. So far, the evidence suggests more mortgages, but for the same people as previously catered for; those with high deposits who pose less risk, but frustratingly, not for the poor first time buyer."

In fairness, whilst 13 lenders have signed up to the scheme, only one lender appear to have drawn down funds and that is the Lloyds Banking Group, owners of Halifax, Cheltenham and Gloucester, Birmingham Midshires, Scottish Widows, Lloyds Spearhead and International brands.

Whilst First Time Buyers continue to struggle to obtain finance, those already on the housing ladder do appear able to adapt to the changing landscape. The latest figures just released by the Bank of England suggest that homeowners are significantly paying off their mortgages with £9.8bn of secured debt being paid off in the 2nd quarter of 2012. The figures assessed between April and June of this year remain consistent with similar figures for Q1 which showed £10bn of secured debt was paid down.

These figures indicate a significant injection of funds by households into their mortgages, serving to increase their household equity and reduce their debt. The Bank has indicated that the injections of housing equity – which have accelerated since the financial crisis started is not a result of any increase in repayments but rather an increasing willingness of households to pay down their mortgages.

The benefit of paying mortgages down increases mortgage choice and according to Moneyfacts Group “those lucky enough to have a 20% deposit now have an extra eighty-three mortgage choices since August, and it is a similar story for those with a 25% deposit who now have eighty-two more choices. So far, the evidence suggests more mortgages, but for the same people as previously catered for; those with high deposits who pose less risk, but frustratingly, not for the poor first time buyer."

The lack of funding drawdowns by the Banks may still be having a positive effect as across the board mortgage rates do seem to be reducing generally, despite their record highs, given the margin between the 0.5% bank base rate and what individual banks are charging. Three month LIBOR, the specialist rate which banks lend to each other is over 0.5% lower now than when the scheme was announced and 2 year and 5 year swap rates have fallen to 0.71% and  1.01% respectively, making overall money cheaper.

There have been strong indications that the Bank of England is introducing an element of flexibility on some of its regulatory requirements, particularly around liquidity and the timescales to implement Basle 3 capital requirements and this may be improving the appetite of some lenders.

However, the Government has made significant funds available over the next 4 years but the Banks as yet, seem to appear reluctant to pass this through to the areas the Government have clearly targeted for help – First Time Buyers.

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