Three months after the launch of the funding for lending scheme, what impact has it had?
Government figures showed that at the end of October, 30 lenders had signed up to the scheme – up from 13 at the end of September – which is a decent proportion of the market and in lending terms should cover the vast majority (the notable exception being HSBC who’ve declared they want nothing to do with the scheme).
The main consequence so far (as we forecast when it was first announced) has been to drive mortgage rates down for the best risk borrowers. Back in July when the scheme was first announced the leading 2-year fixed rates were around 3%, and 5-year fixes a touch higher. Today those lucky enough to qualify can get a 2-year fixed rate at just 1.99% from Tesco Bank (of which more shortly) with a handful of 5-year rates just under 3%.
But these deals need at least 40% equity. A buyer with just 10% deposit is still looking at rates in the region of 4%-5%, little changed from the situation 5 months ago.
It makes sense that lenders will initially target the ideal customer – lots of money, lots of equity, little risk – but as they all chase these borrowers, the profit margins become squeezed, so eventually they will have to look to other sorts of business. Buy to Let is probably a fair bet – again looking for low loan to value, well-serviced loans presents little more risk than residential lending but with typically about 1% a year more profit in them. And then there’s nudging up the loan to value scale on residential mortgages, though probably in baby steps.
That has started already – at 75% LTV rates have come down around 0.5% and a 80% it’s about a 0.2% drop. But I fear the hard-pressed first time buyers scraping together a 5% deposit is likely to find themself waiting quite a while yet to see much real benefit.
The other impact of course, is that practically every press release a lender issues is now forced to drape the Funding for Lending Scheme flag all over itself. When Tesco did it with the launch of (probably) the cheapest 2-year fixed rate in history, it made some sense. But that’s a fairly extreme case. Generally speaking, quite what chanting “FLS, FLS” like some fervent supporter at a presidential rally is supposed to tell us, I’m not really sure.
But everyone is at it, nonetheless. My favourite so far is Co-Op who today put out a release about their new 90% fixed rate mortgage for home movers being a case of Funding for Lending in action. Certainly at 3.99% it’s the lowest rate in its sector but you have wonder why they’re trumpeting about FLS today when the product came out, um, nearly two weeks ago.
Perhaps these lenders feel they need to tell HM Government they’re playing the game. Perhaps they want to explain the sudden move to cut rates (and reluctance to do so earlier) without resorting to the old it’s-the-end-of-the-year-and-we’re-getting-desperate routine.
Or perhaps they’ve recognised the press loves Funding for Lending so it’s an easy line that improves the chance of getting coverage. I can see it now: PR Boss shepherding their minions like a parent at bedtime, and with a pat on head says, don’t forget to FLS your release.
And I have to admit, it works . . .