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FLS data shows sharp fall in mortgage costs


Published: 5 June 2013 | Author: Bernard Clarke

Mortgage rates have fallen sharply since the launch of the Funding for Lending scheme (FLS), according to data published this week by the Bank of England. Figures show that the cost of a fixed rate mortgage at 75% loan-to-value (LTV) has declined by around 80 basis points over the last year, while the cost of a 90% LTV loan is down by even more – at almost 100 basis points.

The data showed that, in the first quarter of this year, 13 firms drew down £2.6 billion under the FLS, taking the total drawn under the scheme to £16.5 billion. However, some commentators were disappointed that net lending by the 40 groups participating in the scheme declined by £0.3 billion during the quarter.

But, in its press release revealing the latest data, the Bank reminded the markets that the original aim of the FLS was to encourage more lending to the UK economy than would have happened without the introduction of the scheme.

Prior to the launch of the FLS last July, the Bank’s staff had judged that UK bank lending had been more likely to decline than increase over the following 18 months. But, having now published data up until the end of March 2013, the Bank said: "Net lending is expected to pick up and become modestly positive over the remainder of the year."

Funding costs, meanwhile, "have fallen significantly since the announcement of the FLS and remain at low levels," the Bank said. It pointed out that rates had fallen not just on mortgages, but also on unsecured personal loans and loans to businesses of all sizes, and published the data in Chart One.

Chart One: Changes in average quoted new mortgage rates and indicative UK bank funding costs since June 2012(a)

4.6.2013 news & views changes in average quoted new mortgage rates data

Sources: Bloomberg, Bank of England and Bank calculations
(a) Change between 30 June 2012 and 30 April 2013
(b) Two-year mortgages
(c) The data are based on a sum of the five-year swap rate and an indicative average bond spread for the respective type of bond.  For more details of the calculation of the indicative bond spreads, see Chart 1.7 of the May 2013 Inflation Report.  

Referring to the picture of "flat lending growth" shown by the latest FLS data, the Bank said that "it will take time for the improvement in credit conditions experienced since the launch of the FLS to feed through to lending volumes." This was due to lags in the loan application, approval and drawdown process, it said.

Despite the flat picture overall, data for the first quarter showed significant differences in net lending volumes by individual firms participating in the FLS. Twenty-seven out of 40 firms increased their lending in the first quarter, together advancing a net £5.1 billion to UK businesses and individuals. But 13 organisations, including some of the largest participants in the scheme, reduced their net lending by a combined £5.4 billion. Of that contraction, £4.9 billion was accounted for by three large firms.

The Bank also said there were variations in lending to different sectors of the economy. Since the start of last year, the flow of lending to individuals had typically been positive, while net lending to businesses had been mostly negative. In the first quarter of this year, however, lending flows have been less negative than before for small and medium-sized enterprises, as well as for large businesses.