The Bank of England and HM Treasury has announced changes to the terms of the Funding for Lending Scheme (FLS) extension, designed to re-focus the incentives in the scheme towards supporting business lending in 2014.
The first phase of the FLS, which ends on 31 January 2014, is unaffected by this announcement.
The Bank of England pointed to the fact that whilst there had been significant improvements in household credit conditions, the same effect had not been seen for businesses – with lending remaining muted.
They said that as activity in the housing market is picking up and house price inflation appears to be gaining momentum there is no longer a need for the FLS to provide further broad support to household lending.
The FLS extension will continue to allow participants to draw from the scheme from February 2014 until January 2015, but household lending in 2014 will no longer generate any additional borrowing allowances.
Instead additional allowances will now only reflect lending to businesses in 2014.
The initial borrowing allowances in the FLS extension already earned by household and business lending in 2013 will be unaffected.
Lending to smaller businesses in 2014 will continue to be encouraged by allowing banks to draw £5 in the scheme for every £1 of net lending to SMEs.
The fee for all drawings from the FLS extension will be set at 25 basis points, which is the lowest point of the previous fee scale.
Commenting on these changes to the scheme, the Chancellor of the Exchequer 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’s why we’re reforming the banks, introducing the employment allowance and now focussing the Funding for Lending Scheme to support them”.
Reaction to the changes was mixed from within the industry with some expecting the change to have fairly minimal effect.
CML director general Paul Smee, said: "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."
Paul Smith, CEO of leading independent estate agency, haart was also positive about the impact: “The scrapping of the Funding for Lending Scheme (FLS) will hardly affect the housing market as mortgages are now cheap and products will remain competitive.
“The main barrier to people moving is the cost – thanks largely to the punitive Stamp Duty which unfairly targets people living in London and the South where house prices are significantly higher. This tax needs reforming in the Autumn Statement next week.”
Others were more concerned about the impact of the changes. Richard Sexton, director, e.surv chartered surveyors, said: “Funding for Lending was the spark that set lending alight, opening up the mortgage market to a host of new borrowers.
“Stopping the scheme could restrict lending, and dampen the hopes of millions. Funding for Lending helped put a lid on rates, and encouraged banks to lend to borrowers with smaller deposits.
“It made lending far more accessible. True, Help to Buy will continue to help borrowers with small deposits access the first rung of the ladder, but if mortgage rates rocket, monthly payments will become the bottleneck for would-be buyers, rather than building a deposit.
“There’s no doubt, banks will be passing on their added costs to borrowers. And borrowers with smaller deposits will be the ones to pay, as FLS is pulled away and the rates they are charged to borrow will start to inexorably tick upwards.
“Lending could already slow in the New Year, with new regulations set to come into play in April. But removing Funding for Lending will have an even greater impact.”
Robin King, Director at Move with Us, said: “It’s positive news that the Bank of England has enough confidence in the housing market to feel it can withdraw funding and hand back market independence.
“However, their reasoning that funding for lending has been revoked to avoid a housing bubble is unfounded as there are no signs of a housing bubble outside of Greater London."
How do you feel about the changes announced? Do you think they will have a big impact?