The announcement by Mark Carney, the Governor of the Bank of England, that the Fund for Lending Scheme (FLS) will be diverted away from mortgages and towards business lending has brought the scheme back into the public eye, but what is it and why might the change impact on homeowners?
2013 was the year of cheap mortgages
Each FLS participant (such as a bank) was able to borrow an amount up to 5% of its stock of loans to the UK non-financial sector from 30 June 2012. They were then able increase borrowings in line with lending up until the end of 2013. Thirty five lenders initially signed up to the FLS and by the end of 2012 it was estimated that as much as 80% of UK mortgage lending came from scheme funds. The idea was to provide 'cheap' borrowing that could be passed on to customers.
However, very quickly it became evident that the lenders were passing these low rates on almost exclusively to so called 'low risk' applicants borrowing typically less than 60% of their home's value. After not considerable pressure from the broker community and the financial media, the authorities must have had a 'quiet word' with the lenders, and rates began dropping at much higher values, up to 90%, albeit not quite as low. Some lenders decided to focus on longer term 5 year rates, some on 2 or 3 year fixed rates.
Cheap fixed rate mortgages to disappear?
Essentially Fixed Rate mortgages have always been based on what's known as 'Swap Rates', this is the price to which the money markets 'sell' money to the banks and building societies. They buy a 'tranche', say £10 million, as a set period, say 5 Years. They then put their profit margin on the rate and pass this onto the public. This explains why Fixed Rates are often here one day and gone the next, once the tranche is gone (like a giant pizza) it's gone.
Basically the Mark Carney's statement means that lenders must (from January) use the funds they draw from FLS to help loans for small and medium businesses. On the face of it this means lenders will have to go back to their traditional lines of finance which will cost them more.
2014 - the year fixed rate mortgages rise?
Well it's hard to tell, but swap rates are still low and lenders want to fill their boots with the rapidly recovering market after a lean few years, so it seems unlikely there will be an immediate impact (price rise) for consumers.
Do be prepared though as rates are still historically low and must rise eventually, the encouraging news in the economy recently and noises from the powers that be suggest 2014 may well be the year rates start to creep up, albeit slowly.
What should mortgage borrowers do now?
Those looking to fix their mortgage rate should act early next year to get the best fixed rates available. Having said that, there is no need to trouble your bank or broker straight after auld lang syne!
(If you wondering whether you should fix your mortgage rate, but don't know a mortgage adviser whose opinion you trust, then Dean, an award winning independent mortgage adviser and contributor to MoneytotheMasses, is happy to help with a FREE no obligation chat (just click here).
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