The Government’s funding for lending scheme launched this week, just as calls emerged for a cut in interest rates to 0.25 per cent. However, the Monetary Policy Committee has ignored those demands; it looks as though it will wait to see what impact the funding for lending scheme has before deciding on further stimulus – whether it’s cutting base rate further or more quantitative easing.
The funding for lending scheme is open for the next 18 months, enabling lenders to borrow at cheaper rates for up to four years. Banks are incentivised to increase their lending to individuals and businesses, with cheaper rates for those who do so. However, there are no other requirements, such as increased lending to those requiring higher loan-to-values (LTVs), which has been criticised.
But while lenders have been favouring low-risk borrowers with big deposits in recent years – most notably offering rock-bottom five-year fixes in the past couple of weeks – there is only a finite number of people with a 40 per cent deposit or more. These borrowers are in great demand from all lenders, so if banks and building societies only focus on them, offering them ever cheaper rates, they will struggle to boost their lending volumes.
To really do some serious business, lenders need to move up the LTV curve, lending to those with smaller deposits who are not as well catered for. This should mean more competitive rates at 80 or 85 per cent LTV. Ideally, there would also be more lending at 90 per cent LTV if the market is to get a real boost.
So while lenders won’t be forced to lend at high LTVs, if they don’t they may struggle to do enough lending to qualify for the cheapest fee to borrow via the scheme. There may well be more attractive options for those requiring a high LTV – you might just have to wait a little longer to see those start to come through.