The Bank of England has removed support for the government’s Funding for Lending scheme, amid fears over a possible housing bubble that could push Britain’s recovery off course. The decision was made in conjunction with the Treasury.
From February 2014 the Funding for Lending Scheme (FLS) will not apply to household lending, but will continue for business lending under altered conditions.
Under the FLS, UK banks are able to borrow money from the central bank at very low rates, on the proviso that this capital is lent to individuals or businesses. However, with year-on-year house price rises not seen since before the crisis, there are real concerns over a possible housing bubble, which might have a knock-on effect across the economy.
Funding for Lending – the provision of cheap money to banks – and Help to Buy are two of the government’s flagship economic policies, designed to get more people on the housing ladder. Help to Buy helps would-be purchasers by providing an equity loan of up to 20 per cent of the house value, as long as the buyer can put up a 5 per cent deposit. The remaining 75 per cent of the house price is made up by the mortgage.
Since Help to Buy and Funding for Lending have been in place, very low interest rates on mortgages have been made available to the public.
While the two policies appear to have been operating in conjunction with each other, Mark Carney, the Governor of the Bank of England, said that changing the FLS in this way was not at odds with the function of Help to Buy.
Critics of Help to Buy and Funding for Lending – including the business secretary Vince Cable – suggest that the schemes could artificially push up house prices. Some argue that a low level of private house building and the non-existence of council house building are at the centre of the issue – a lack that may be driving up prices of existing housing stock.
Perhaps you are one of our buy-to-let or landlord insurance customers who have taken advantage of these credit easing initiatives. Do you believe the UK may be facing a housing bubble? Or will the BoE’s new measures cool off the market?