Bank of England to help lenders with £50 billion Special Liquidity Scheme.
The Bank of England has announced a special scheme designed to help ease the problems in the UK mortgage market.
Banks are reluctant to lend to each other as they are unsure who might be hiding losses, incurred largely from investments in US mortgages. This lack of confidence means that lenders are unable to sell, or offer as security for a loan, even high quality UK mortgage backed assets, so obtaining funds to lend to the consumer is difficult. Those funds that are available are more expensive, and this higher cost is passed on through higher mortgage rates.
The Bank of England solution
The BoE is putting up £50 billion in Treasury Bills, which lenders will be allowed to swap for their high quality UK mortgages for up to three years. As Treasury Bills are government backed and therefore more desirable than the lenders mortgage assets, lenders will be able to use them to raise funds.
Is this passing the lenders risk onto the taxpayer?
No. The Bank of England, and ultimately the Government, has proposed this package on the basis that they will pay between 70% - 90% of the face value of the lenders assets. In addition should the value of the assets the lender puts up as security fall, then they will either have to reduce their borrowing from the bank, or provide additional security.
Will this mean cheaper mortgages?
Certainly not in the short term, and it’s unlikely that we will get back to the extremely cheap mortgage deals of recent years for some time, if at all.
What we will hopefully see is confidence returning to the market and more stability which should mean that specific mortgage deals are around for longer periods, so we can move away from the here today gone tomorrow climate. However, any changes are likely to be gradual and it may be some months before we see any evidence of this.