Experts say scrapping FLS will not slash volumes but rates will rise

Mortgage experts are confident the Bank of England’s decision to scrap the Funding for Lending Scheme for residential mortgages will not slash lending volumes but they warn of rising rates in the coming months.

The FLS was originally planned to last until January 2015 but last week it was announced there will be no new cheap funding available to banks for mortgage lending come February. Business loans will still be eligible until January 2015.

Since its launch in the summer of 2012, the FLS has been credited for allowing banks to offer some of the lowest mortgage rates ever seen in the UK.

But last week the Bank said that as activity in the housing market was picking up and house price inflation appears to be gaining momentum, the FLS is no longer needed for mortgages.

It said there is no impact on Help to Buy which is designed to help borrowers with lower deposits access funding, whereas the aim of the FLS is to boost lending.

Speaking last week, BoE governor Mark Carney said: “Over the past year the FLS 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.”

Experts do not believe the Bank’s decision will hit mortgage volumes but warn borrowers the rates on new mortgages could increase by as much as 0.75 per cent by the second quarter of 2014.

Industry consultant Mehrdad Yousefi says: “I don’t think it will have any detrimental impact in terms of volumes and activity in the mortgage market now or over the next 12 to 18 months because the market has momentum throughout the UK, partly because of Help to Buy.

“It is good news for savers in a few months time but it is also possible mortgage rates could go up by as much as 0.75 per cent over the next three or four months.”

John Charcol senior technical manager Ray Boulger says: “I think one has to be a little bit more cautious for 2014. I had been saying £200bn but I don’t think one has to knock much off that for next year [off the back of the announcement].

“Demand is picking up – we are seeing an increased level of activity in the market and the signs are that is going to continue – so I would probably forecast £195bn now.

“It is two or three months away before we start to see any rise in rates and I am not sure it will happen even as early as that, unless the market moves on when it thinks Bank rate is going to rise.”

Separately, the Bank last week threatened to impose tough new curbs on mortgage lending to ward off a future housing bubble.

While it said there is no “immediate threat” in its quarterly Financial Stability Report,  it warned that it could tackle a house price bubble with tougher capital rules in targeted areas of lending alongside loan-to-value and loan-to-income caps.