Mortgage rates could be pushed upwards by the ending of two government schemes that offer lenders access to cheap funding.
The Funding for Lending Scheme, introduced during the 2012 credit crunch, came to an end on 31 January. Just one month later (28 February) the Bank of England will close its £140bn Term Funding Scheme, which was launched in August 2016.
The TFS effectively allowed lenders to borrow at levels close to the base rate. However, there was an important caveat: the cheapest funding was available only to institutions that increased their net lending.
Mortgage experts agree that both schemes have oiled the wheels of the mortgage market in recent years and helped keep rates low.
Association of Mortgage Intermediaries chief executive Robert Sinclair says: “There is no doubt that these schemes have helped underpin low mortgage rates for quite some time.”
The question is what will happen to the mortgage market as lenders are forced to wean themselves off this cheap funding.
Most do not expect any instant shock to the system, partly because of the way these schemes are structured. For example, all FLS loans had to be repaid when the scheme ended. However, funds can still be accessed through the TFS for a further month, and will not have to be repaid for another four years.
Mortgages for Business chief financial officer Simon Whittaker explains: “When the FLS was extended in December 2014 it was stipulated that it would end in January. All the institutions accessing the cheap money under the FLS will have planned for repayment of this borrowing, and will already have planned their lending activities and their deposit funding to replace the FLS in advance.”
It is less clear what effect the withdrawal of the TFS will have on the market. The Government extended the funds available for the scheme for the second time in November, to meet expected lender demand ahead of the February deadline.
Sinclair says: “I’d expect a reasonable amount of this funding to carry over from the first quarter of this year into Q2.”
In other words, this could continue to help fund lower-cost mortgages for at least another month or two, particularly because those accessing this scheme will be looking to increase their net lending.
Sinclair adds: “I don’t think there will be a cliff edge but we may see rates gradually drift upwards in April and May, and towards the end of the second quarter.”
London & Country associate director of communications David Hollingworth says: “Will lenders be able to replace funds at such a low cost? If not, this will put pressure on mortgage rates.”
Fleet Mortgages chief executive Bob Young says: “Rates are probably going to have to go up as banks look at alternative funding options. This is either raising money via deposits or accessing funds on capital markets.”
Raising money via deposits is expensive, says Young. There is good liquidity on capital markets at present, which feeds in to more competitive pricing. But funding will be more expensive than the cheapest options available through the TFS, he adds.
Bank of England figures show which banks have made most use of these cheap credit lines. While the biggest lenders have generally borrowed the most, there is considerable variation.
For example, Lloyds Banking Group had the largest outstanding TFS drawings at the end of August last year, at £18bn. Royal Bank of Scotland was next (£14bn), followed by Barclays (£10bn), Nationwide (£9.4bn) and Santander (£8.4bn). HSBC did not access these funds at all.
Among smaller lenders, firms that have made most use of this funding are: TSB (£4.5bn outstanding), Virgin Money (£4.1bn), Metro Bank (£2.1bn), Clydesdale Bank (£1.9bn) and Coventry Building Society (£1.5bn).
The majority of banks accessing the funding have increased their net lending over this period (from 30 June 2016 to 30 August 2017), often substantially. RBS, for example, raised its net lending by £15bn, Nationwide by £8.4bn and Virgin Money by £5.9bn.
John Charcol senior technical director Ray Boulger thinks the TFS may be one of the reasons lenders have been more supportive of brokers doing product transfers, via procuration fees. “Keeping existing customers helps net lending figures, which may mean access to these cheaper funding sources,” he says.
The final question is whether the Government will offer another last-minute reprieve and extend this scheme again.
Sinclair says: “There’s a date where banks will have to start repaying these loans. At that point there will be a decision as to whether there would be a benefit in providing a further support mechanism.”