Boost for savers as govt mortgage scheme closes early
The Funding for Lending scheme (FLS) for residential mortgages is to be stopped a year early, prompting speculation that mortgage rates - and savings rates - could soon start to rise.
From the New Year, mortgage lenders will no longer be able to apply for cheap funding from the Treasury, in a bid by the government to reduce the risk of the housing market overheating.
The scheme had been expected to run until January 2015 and while no new money will be given to mortgage lenders from the start of 2014, the lenders will be able to draw on any funds they have previously been allocated but not yet used.
FLS is widely considered to have been a key driver in bringing mortgage rates down since its introduction in the summer of 2012 and there is some speculation that rates could now start to rise.
Will mortgage rates rise?
David Hollingworth, spokesperson for broker London & Country Mortgages, said: "FLS has been absolutely key in increasing competition in the mortgage market since its introduction. Now it is to be withdrawn from mortgage lenders the question is how will it effect the cost of funding for lenders and will mortgage rates start to rise?
"The cost of funding certainly won't be any cheaper but the mortgage market is in considerably better shape than it was when the scheme came in so while I would expect to see mortgage rates start to creep up, I don't think we'll see immediate, or rapid, hikes."
He added that LIBOR - another factor that determines the cost of funding - is much lower than it was in the aftermath of the collapse of Lehman Brothers and the ensuing credit crunch and so that should help to help mortgage rates down.
"It might even be good news for savers if lenders are no longer able to rely on cheap funding from the government, which has meant they have been less inclined to encourage savers to deposit their money with them."
The focus of FLS will now shift to supporting small business lending.
Chancellor George Osborne said: "The FLS proved to be a successful tool in supporting the recovery. Now the housing market is starting to pick up, it is right we focus the scheme's firepower on small businesses.
Small firms are the lifeblood of our economy. That is why we are reforming the banks, introducing the employment allowance and now focusing the FLS to support them."
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.