In their Mansion House speeches last night, Chancellor George Osbourne and Bank of England Governor Mervyn King announced two new schemes to support bank funding. As ever with these things we had the grand announcement with little detail, but here’s what we know so far, and some initial thoughts on what it might mean for the UK mortgage market.
There are two distinct schemes that shouldn't be confused: there’s the £5bn+ per month emergency liquidity support, and then there’s the unspecified Lending for Funding scheme aimed at boosting loans to businesses and homeowners.
The first is in fact an existing scheme announced last year that is now being activated. The technical name is the Extended Collateral Term Repo Facility and, as Mervyn King quoted in his speech, is there “in response to actual or prospective market-wide stress of an exceptional nature”. That’s Europocalypse, in case you were wondering.
More directly relevant to you and me is the second element, which routes cheap funding to the banks on the explicit condition that it is lent to real people (as opposed to sitting on banks’ balance sheets). On the face of it this can only be a good thing so let’s try to gauge what impact it might have.
Reports are that the facility will be uncapped with many people citing a figure of around £80bn. The political and economic impetus is behind lending to businesses so you’d imagine the majority will be directed there rather than into mortgages. Even so, if only one third of it went to mortgage lending that would be about £27bn. And let’s suppose that’s directly lent out again on a 1-to-1 basis (rather than sitting as capital to support a higher level of lending). In a market estimated to be about £135bn this year, that would give an increase of around 20% - so that looks really encouraging.
Robert Peston in his blog has already queried whether this will work because a) people (and businesses) are reluctant to borrow anyway and b) those who need to borrow are too high a risk for the banks to take them on. Personally I think that’s a touch pessimistic but there is truth there.
In mortgage terms, this funding is unlikely to make banks any keener to offer, say, 95% mortgages or loosen their affordability tests – not least because more cautious lending policy is supposed to be one of the lessons of the credit crunch. Nor will greater availability necessarily make people want to borrow more. As has been noted ad nauseam, anyone able to reduce their debts would, on a personal level, be well advised to do so – the issue is everyone doing it all at once.
However even if it resulted in absolutely no additional lending (which is hard to believe), it’s hardly a futile exercise.
The trigger for all this is fear over the coming Greek elections and the potential economic fallout. It’s not even particularly pessimistic to envision wholesale markets drying up – at least in the short term – preventing banks accessing funding. We've commented before that the start of 2012 had a mini-crunch feel to it – imagine what a bad reaction to this weekend's elections in Greece could do. So it could well be that much of this new funding merely replaces what gets lost in Europanic. If this facility heads off a collapse in lending I think we should all be profoundly grateful (though I must declare an interest – it might also keep me in a job).
The other hopeful aspect is that the greater availability of funding at cheaper rates could enable lenders to bring mortgage rates down. We've already seen Halifax, Bank of Ireland and Clydesdale increase their standard variable rates this year as a result (they say) of funding costs. And for most of the year, mortgage rates for new customers have been steadily rising as well. If this facility reassures banks that they can access relatively cheap funding, they can plan with more confidence and start to compete again.
That in turn should start to push prices down meaning more cash in the consumer’s pocket – not just homebuyers having cheaper loans but more people able to save money by remortgaging to a cheaper mortgage deal as well.
So I wouldn't expect a big jump in new mortgage lending to come out of this, but we can hope that at worst it helps avert disaster – and may even make many homeowners a bit better off.