Funding for Lending impact more than BoE Q1 statistics show
Posted on 3 June 2013 by
It is difficult to interpret what the release today by the Bank of England of Q1 FLS figures tell us about mortgage lending because the figures cover all qualifying lending. Although net personal (the vast majority of which will be mortgage related) and business lending fell by £300m in Q1 2013 net mortgage lending increased but not sufficiently to offset the reduction in net business lending.
For example, Clydesdale, which has registered for FLS but not yet drawn down any funds, reported negative net lending of £371m but as it announced last year it was pulling out of the commercial sector but it is still very active and competitive in the residential mortgage sector, this negative figure almost certainly hides a positive net lending figure for residential mortgages. Likewise RBS, which has only drawn down £750m of FLS, reported negative net lending of £1.62bn in Q1. Over the last few years RBS has been increasing its net residential mortgage lending and rapidly decreasing its exposure to other sectors and so again this negative figure probably hides a positive figure for residential mortgage lending.
As far as the mortgage market is concerned the real question about the success or otherwise of FLS is what would have happened without it? Such a counterfactual is by definition impossible to be entirely confident of answering. However, one result which one can be entirely confident in attributing to the FLS is the large reduction in interest rates. Many mortgage rates have fallen by over 1% since the scheme was announced. For example the cheapest 5 year fixed rate in June last year was 3.69%. Today several lenders offer 5 year fixes at 2.49%.
Lower rates increasingly now also apply at higher LTVs, especially up to 85%. For example the lowest 5 year fix at 80% LTV last June was 4.15%. Today it is 3.35%, interestingly from the same lender, Hinckley & Rugby B S, but today’s fixed rate has the added benefit of no early repayment charges. At 85% LTV the lowest generally available rate last June was 4.69%. Today it is 3.59%.
I think that one of the reasons take up of FLS has been lower than was probably expected is that the fact that such cheap money was readily available from the BoE has resulted in other wholesale and savings rates falling so far that lenders have seen less need to use FLS funds, and it is helpful for liquidity and treasury planning to keep a substantial source of readily available cheap funds on tap.
Most lenders have a significantly improved appetite to lend in the residential mortgage compared to a year ago and it seems reasonable to attribute most of this to both the direct and indirect effects of FLS, with the indirect effects probably being more important! Increased confidence in the state of the property market, which itself results partly from lenders’ increased appetite, will probably become an increasing influence in lenders’ attitudes over the next year or so
Hopefully this will result in an easing of some of the sillier criteria restrictions imposed by lenders over the last few years, such as not lending even on a low LTV to older people who have adequate pension income to meet the affordability criteria which would be applied to younger people. Now that the FSA/FCA has clarified its position on lending into retirement (whatever retirement age is these days) lenders can no longer blame the regulator for not lending in this sector of the market.
I think that the modest increase in property prices we have seen this year so far (Nationwide index up 3.5% in the first 5 months of the years based on actual prices, not the manipulated seasonally adjusted ones) can be put down largely to FLS, not Help to Buy, as it is too early for the impact of Help to Buy to yet be reflected in the indices. As the actual prices used in the Nationwide index fell in 5 of the last 7 months of 2012 it seems likely that Nationwide's year on year figure will increase most months for the rest of this year from the current 1.1% and I have increased my forecast for the change in house prices in 2013 from my original 2% to 5-6%.
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