News of the extension to the Funding for Lending Scheme (FLS) earlier this month has had a mixed reception – and with good cause.
It is indeed positive news that the Bank of England has observed the impact of FLS, recognised its merits and decided to extend the scheme in order to deliver greater results. Whether the scheme will achieve its aims in its new form remains to be seen.
Thus far FLS has improved conditions, fuelling competition for business between lenders and subsequently improving the number of mortgage products available, as well as mortgage rates. There were 20% more products available on average this March, compared with July 2012 prior to the launch of FLS. Furthermore, apart from December 2012 when the average total product number fell by 1%, consumer choice has improved every month since the FLS began.
Rates have seen similar improvements, with average two year fixed rates dropping below 4% to 3.9% in March – the lowest since MAB’s records began in June 2007 – and 0.78% lower than in July 2012 before FLS came into effect.
However, the decision to incentivise lenders towards lending to small and medium enterprises (SMEs) raises concerns that this will channel money away from mortgage lending. To date the Government funding has primarily concentrated on low LTV lending and remortgaging. If these no longer feel the benefit of the scheme, the progress achieved could start to slide.
In addition, greater helpings of funding for those on the fringes of the mortgage market are still desperately needed. Those knocked back due to strict lending criteria or scared away by towering deposits have seen little change to the amount required for borrowers, with average LTVs remaining close to the 70% mark.
It was hoped that any extension to FLS would include non-bank lenders to help make improvements to the market stretch further. Excluding them has been called prejudicial, effectively restricting consumer access to credit from products authorised by the financial regulators. It’s worth noting non-bank lenders are some of the most innovative in the market. They often accept applicants who would fail standard bank checks thanks to more thorough background investigations, and also pave the way for new product implementation.
While improving access to funding for small and medium sized businesses should help towards overall economic recovery, we must hope the strong incentives towards this form of lending don’t dissuade lenders from pursuing greater volumes of mortgage lending. Business owners have good reason to celebrate the FLS changes, but as for mortgage borrowers, the implications remain to be seen.
