The scheme, which will continue to run until January 2015, will be re-focused to support lending to businesses throughout next year with incentives in the scheme skewed heavily towards lending to small and medium-sized enterprises.
Governor Mark Carney 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.”
Chancellor George Osborne 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.”
The FLS has contributed to a substantial fall in bank funding costs since it was launched in July 2012 which has fed through to significant improvements in household credit conditions.
Credit conditions for smaller businesses have also improved but to a lesser extent and lending to businesses overall has remained muted.
In a statement released by the Bank it said: "The changes we are making have no implications for HM Government’s Help to Buy scheme, which is designed to address the specific issue of access to mortgages for borrowers without large deposits, unlike the FLS which was designed to boost lending more generally."
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.
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."
The first phase of the FLS, which ends on 31 January 2014, is unaffected by this announcement.
