The Funding for Lending scheme for mortgages, which allows banks to borrow from the Bank of England at lower than market rates, has been scrapped.
In an announcement made with HM Treasury, Mark Carney, governor of the Bank of England, said that support to household lending was no longer necessary.
Instead, the scheme will turns its attention to supporting small to medium sized businesses.
However, the changes announced today will not affect the government’s Help to Buy scheme.
The news will come as little surprise to many critics of the Funding for Lending scheme who felt that support to new businesses needed to take higher priority over the housing market.
Support for new business
Earlier this year the British Chambers of Commerce urged Mr Carney to do more for new businesses, with director of policy, Dr Adam Marshall saying that the credit environment was not where it “could or should be”.
“Large and established firms often have little difficulty in accessing the finance they need, yet the acid test for the Funding for Lending scheme has always been whether it can improve the flow of credit to younger, fast growing companies that could end up being the wealth creators of tomorrow,” Dr Marshall said.
Recent data from the Council of Mortgage Lenders (CML) has also appeared to back the Bank of England’s line of thinking today, with first-time buyer lending in London said to be up year-on-year by 32% in the third quarter of 2013.
Changes to Funding for Lending “not a shock”
Director general at CML, Paul Smee said: “Although the changes to the FLS may be a surprise, they are not a shock. Mortgage lenders are well equipped to meet their funding needs, as wholesale funding market conditions have improved and retail deposits are robust.”
Lending to smaller businesses in 2014 will continue to be encouraged by allowing banks to draw £5 in the scheme for every £1 of net lending to small to medium sized enterprises, but additional allowances will now only reflect lending to businesses, rather than household borrowers.
Commenting on the changes to the Funding for Lending scheme, the chancellor, George Osborne said: “Small firms are the lifeblood of our economy. That’s why we’re reforming the banks, introducing the employment allowance and now focussing the Funding for Lending Scheme to support them.”