The Bank of England is removing its support for funding for lending – mortgage version – but does that mean your mortgage rate is going to rise?
Well it may be the beginning of the end. The Bank of England and the Government have made several big interventions in the mortgage market.
These include keeping the base rate very low and promising to keep it low for some time. Arguably it includes quantitative easing, though the Bank isn’t expected to do much of that anymore.
It certainly involves Help-to-buy, a government scheme designed to get first time buyers on to the housing ladder and of it involves Funding for Lending. What some people may have overlooked is that withdrawing a scheme can make borrowing more expensive so that it feels a little bit like raising interest rates.
Lenders will not now be able to call on cheaper funding from the Bank. This could then feed through to you the borrower, though it’s not likely to have an instant impact on say your lender’s standard variable rate.
Indeed, the Bank and the Government can argue that things are getting closer to normality. Banks can now source funding for mortgages themselves. They might even argue that there is enough choice in the market.
The Bank may also feel that it has answered its critics in terms of Help-to-Buy encouraging a bubble. Rather than stop that scheme they have found another level to pull back on.
Even then, there is still some funding money available. Some banks have not called on all the cheap funding allocated to them yet. If they haven’t used it all, they could still be funding mortgages very cheaply. But if banks want to increase the funding above their allocation, it must be destined for small businesses not mortgage borrowers.
In that case, to fund mortgages they must look elsewhere – the institutional funding market will be more expensive than that offered by the Bank at 0.75% – or by raising money from savers. This is good news, if you are a saver.
If you are borrower, this does make it likely that deals will get a little less interesting. They are still likely to be very good especially if you are deemed a safe bet and have lots of equity in your house and want a low loan to value mortgage.
But it also means that the direction of travel for rates should change soon. So two and five year fixed rate mortgages are estimated to be about one per cent lower than they were before funding for lending. Those rates will surely ‘normalise’ soon.
How soon the end of FoL feeds through may be difficult to tell given that some lenders haven’t used up all their allocations.
If you are coming up to renew your mortgage it might be something to talk to your mortgage broker about. But the big issue, as always, will be making sure you can afford a substantial payment shock from rising interest rates. That can be quite substantial if we move from very low to significantly higher rates, but that seems a while off yet.
Ending support now, of course may mean the Bank is not caught unawares and has to dramatically raise rates, which is, ultimately, best for a lot of borrowers. As Mark Carney said this week: “By acting now in a graduated fashion, authorities are reducing the likelihood that larger interventions will be needed later”.
Of course for those who can’t afford to buy, more homes are being built, but demand looks set to outstrip supply for a long time to come. Indeed today’s news actually saw the share price of Barratt Homes and Taylor Wimpey fall by around 5% as BBC reports. That issue is not within the Bank of England’s power to solve.