As the Bank of England reports, the aim of the Funding for Lending Scheme is to encourage more lending than would have been the case in the absence of the scheme. This includes encouraging banks that are planning to lend less to households to cut back less than would otherwise be the case.
The Bank also warns it takes time for reduced funding costs to flow through into lending given the typical lags involved.
This is useful context for a mixed set of figures. The figures show both UK households and companies and so the net lending to households – and in particular the net lending on mortgages – is not immediately clear. Fortunately, we get some further information from the annual accounts of the major banks that have recently reported.
Lloyds Banking Group and Santander have shrunk their mortgage books this year. With the number one and two mortgage lenders shedding assets, others have grown their lending to fill this gap. Barclays and Nationwide are the obvious examples. Royal Bank of Scotland has also delivered net mortgage lending, although its FLS asset base overall has shrunk.
In addition to Nationwide, other building societies have also increased the size of their mortgage books. Lloyds – where retrenchment slowed in the last six months of last year – has signalled that it intends to return to net mortgage lending in the second half of this year, while Santander has indicated a continued period of retrenchment, yet at a slower rate than in 2012.
The key question therefore is the extent to which a likely growing market appetite for lending in 2013 can be achieved through increased housing activity.
Part of the answer will be the extent to which lower mortgage rates and any loosening of credit criteria increase activity in the housing market. Lower mortgage rates are not included within the Bank’s FLS reporting, but the fall in rates can be easily tracked. The Bank’s quarterly Trends in Lending report shows lending rates and does demonstrate this downwards trend amid a continued narrowing between shorter and longer term fixed rates.
It is too simple to directly equate FLS with falling rates and to seek to align FLS drawdowns with mortgage net lending. In addition to FLS, lenders have been helped by more liquidity changes and through an increased stability in the eurozone.
What is clear, however, is that access to significant volumes of cheap funding has helped shift the balance between supply and demand for funding in a way that has in turn enabled mortgage rates to fall.
In this context the first-time buyer figures published by the Council of Mortgage Lenders are a welcome indicator of some recovery in the housing market, with lending figures being the highest since 2007 across the UK. There are increasing low deposit options for first-time buyers and given falls in the average cost of a first-time buyer property since 2007 and in average first-time buyer rates, buyers are spending less of their income on their mortgage in both percentage and absolute terms compared to more than five years ago.
With FLS ending on 31 January 2014, the late winter and early spring of next year is looking like it may be a particularly interesting and intense period for the industry.
FLS usage and lending data (Source: Bank of England):