Funding for lending scheme to launch next month

| July 13, 2012
Funding for lending scheme to launch next month

The Treasury and the Bank of England have revealed details of their multi-billion pound ‘funding for lending’ scheme which will begin in August and run for 18 months.

The initiative is designed to make it easier and cheaper for businesses and individuals to secure loans and mortgages.

It is hoped that it will help to ease the squeeze on credit in the face of the ongoing eurozone debt crisis.

Banks and building societies will initially be allowed to borrow 5 per cent of the amount they currently lend, from the Bank of England, at a rate of 0.25 per cent for four years.

This is significantly cheaper than the cost of borrowing on wholesale financial markets.

If financial institutions borrow money from the scheme and then cut the total amount they lend, the rate will increase to a maximum of 1.5%.

The first funding allocation is expected to total around £80 billion.

Banks and building societies will only be able to borrow more from the scheme if they boost the amount they lend.

The Treasury and the Bank of England said: “For every pound of additional real economy lending an institution advances, an additional pound of access to the scheme will be permitted for that institution.”

Mark Harris, chief executive of SPF Private Clients, is calling for cheaper mortgages to be made available to people who are currently unable to afford to buy a property.

“If funding will only be cheaper and easier for those with, say, a 50% deposit or similar level of equity, for example, there will be little improvement on the current situation,” he warned.

In a letter to Bank of England governor Sir Mervyn King, Chancellor George Osborne said the scheme would “support the flow of credit to where it is needed, complementing the MPC’s asset purchase programme in easing monetary policy conditions”.

The Council of Mortgage Lenders (CML) reported a 36 per cent increase in house purchase lending in May, compared with the previous month.

Compared with the previous year, the increase was 29 per cent.

Despite the improvement, industry experts warned that this could reflect a seasonal improvement which might not be sustainable in view of ongoing economic difficulties.

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