Bank and Treasury cool mortgage market

Mark Carney Mark Carney wants to turn up the heat in the business lending market

Amid concern that a housing market bubble may be in the making, the Treasury and Bank of England have today removed an important incentive to banks to supply cheap mortgages.

They have done this by modifying the Funding for Lending Scheme. This was launched in July 2012 and in the first 11 months saw 28 banks borrow £17.6bn from the Bank of England, at an interest rate often as low as 0.75%.

The scheme was designed to encourage mortgage lending and lending to businesses.

So far, it has been much more successful in stimulating the supply of mortgages: approvals of mortgages are currently running at a monthly rate a third higher than in 2010-11, though they are still almost 40% below the average monthly supply in the 10 years before the 2007/8 crash.

And the typical price of mortgages has come down by more than a percentage point.

When I speak to banks and housebuilders, they all say that the cause of the current momentum in the housing market is due much more to Funding for Lending than the government's two, and more controversial, Help to Buy schemes.

However, business lending is still contracting.

So the Bank of England and Treasury have made two important modifications to Funding for Lending.

Each bank's entitlement to cheap loans from the Bank of England is currently based on the quantity of loans the bank makes to businesses and households. But from next year, the entitlement will be assessed only on the volume of business loans made: lending to households will not unlock any new cheap funding from the Bank of England.

Or to put it another way, if banks want to maximise their access to the cheap finance, they will have to lend as much as they can to businesses.

And the second modification is that the cost of borrowing from the Bank of England will cease to be variable. It will be fixed at 0.25% plus Bank Rate - or 0.75% - which is the very cheapest rate.

That lowest possible rate will no longer be available only to those who lend more than their customers are repaying (those who increase net lending).

Anyway, the point of all this is to turn down the heat under the mortgage market, and turn it up a bit in the business lending market.


Well, the UK economy is currently growing faster than all the major developed economies. But that rate of growth won't be sustained for long if it's too dependent on same-old, same-old household spending, combined with a traditional revival in the housing market, while business investment and exports remain flat as a pancake.

UPDATE 13:05

Although the Bank of England may be right that the change to Funding for Lending has not increased the cost of money, that amendment plus other reforms announced today may lead to a pronounced contraction in the supply of cheap mortgages.

The Bank of England is making mortgages more expensive for banks to provide by ending the exemption they enjoyed from the capital charge imposed on them: it means that banks will only be able to make new loans to households if they hold adequate expensive capital.

Or to put it another way, in a world of scarce and expensive capital, this change makes mortgages scarcer and more expensive - though the precise short-term impact is hard to gauge.

And the Bank has also made clear that it will pay particular attention to whether banks' customers can repay their mortgages when conducting thorough assessments or stress tests of banks' strength.

That will act as a deterrent to banks providing loans with a high value relative to the property value, even if those mortgage loans contain an element of state guarantee via the Help to Buy scheme.

In the round, therefore, the Bank of England does seem to have put a firm push on the brake to prevent the housing market motoring away.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 270.

    To think is to meet 'conflict', to spend to make thin the purse, but 'in everything we do', think, pay for, need not be competing for income-share, doors open to the tyranny of Mammon

    Grounder @268
    "heart & soul", what else, once material advantage agreed as excluded with respect to income-flow, 'incentive' in self-attendance, choice of spend, larger house or longer holiday

  • rate this

    Comment number 269.

    Grounder @262
    "the alternative"
    Is NOT "failure"!

    In equal partnership, giving up our own 'freedom to be corrupted', we would - if agreed - gain ten billions of partners truly 'deserving of our RATIONAL trust

    Some prize, some promise!

  • rate this

    Comment number 268.

    @264. All for All "There IS incentive in 'what you can do for…" heart & soul?"

    Agreed. But that is not an incentive that is equally efficacious between all parties under all circumstances. We may strive to unequal degrees for more unequal housing, but it is indeed a national shame and disgrace that there is insufficient housing available for every citizen's ability to pay.

  • rate this

    Comment number 267.

    @266 All for All
    to put conflict of interest at centre stage hardly is to leave human behaviour unexamined.
    Or is viewing human behaviour as one of conflict somewhat bypassing everything that we do and have in common.

  • rate this

    Comment number 266.

    To put 'conflict of interest' at centre-stage, hardly is to "leave human behaviour unexamined"! There is nowhere, in business or academia or even in the church, where material insecurity & hope of escape have not caused or permitted the corruption of 'even' the cleverest. IF to be rid of 'the symptoms', we need to address agents & source, fear & greed & inequality. Liberate the good

  • rate this

    Comment number 265.

    What has happened to our economy if Banks have to be lured into lending to business.

    In any sane society they would do it as a matter of course since it is the development of new business that leads to real wealth not you and I constantly selling our houses to each other.

  • rate this

    Comment number 264.

    Grounder @262
    "the rub"
    But we can argue our case (on share of labour etc), without losing sight of the agreed immense value of income-equality (for rights & economy). Those truly incapable of partnership at least need to turn up (for employer or client) to earn their equality. Economics as study IS 'unavoidable': error, sadly also. There IS incentive in 'what you can do for…" heart & soul?

  • rate this

    Comment number 263.

    aj@259 & Ray@261
    "reduction (in value)
    (for everyone) to afford a house"

    Markets always drive, whether of ideas or of money, the distribution of power will be reflected in the distribution of emergent good: and the unequal distribution of income - coupled with unequal wisdom or lack of wise option in spending - may feed worse inequality in power

    The 'real deal' must involve price AND access

  • rate this

    Comment number 262.

    @258 All for All "Partnerships go wrong"

    Ay, there's the rub!

    @260. All for All "any 'success' has been gained as passenger or placebo"

    Perhaps so, but the alternative is failure. Economics is unavoidable. By all means leave human behaviour unexamined, if you must, but do not expect to be able provide for your every need yourself or to have all your needs met by others, absent incentives.

  • rate this

    Comment number 261.

    Reduction in house prices could be achieved by property taxes on 'higher value' properties. This could reduce the investment value of homes at the top end and would also suppress overheated property values all the way down the scale. additional council tax bands could be used. The old Etonians wouldn't do this as it would affect their billionaire mates.

  • rate this

    Comment number 260.

    Grounder @258
    "components of effectiveness"

    Gradations in medicine addressed as 'efficacy', in a population, for given dose & frequency, for set success-criteria, cure, etc

    As for witch-craft, for much of 'economic theory' to-date, any 'success' has been gained as passenger or placebo, and very arguably our greatest ills - misery & anxiety, crisis and war - are owed entirely to these false gods

  • rate this

    Comment number 259.

    this will not help anyone. Houses are far to costly and only a reduction by 50% in their value will help people to be able to afford a house, but thats not going to happen is it.

  • rate this

    Comment number 258.

    'might' agree
    Equal Partnership
    'more in theory than practice'
    BUT never agree what it means?

    Partnerships go wrong, usually on to new partnership. How many, in normal course of marriage / business, fail to find in bottom-line equal division 'good enough' assurance of 'good enough' means for personal expression in the world? Equality in share of money-flow: choice, not prescription.

  • rate this

    Comment number 257.

    @253. All for All "'adequacy of regulation', and 'in whose judgement?'"

    I suggest those are components of "effectiveness". We are unequal in knowledge, experience and wisdom, so we must (on occasions) entrust judgment to "more equal" others. But do we then wash our hands of collective responsibility, or accept that we must all try to hold them to account, to the best of our individual abilities?

  • rate this

    Comment number 256.

    @227.John Campbell
    One can envisage a capitalist system that doesn't have debt creation at its heart but as it stands the entire system is based on the creation of debt, For politicians to then perpetuate the idea that debt is a 'really bad thing' when its actually an inevitable consequence of their approach to capitalism is at best disengenuous.

  • rate this

    Comment number 255.


    Limited liability and legal purchasing power. The playing field favours economic entities that are not individual people.

  • rate this

    Comment number 254.

    If, as officially stated, 80% of bad debts are derived from the holy and apostolic commercial enterprises: why are only personal debtors castigated? How much commercial debt is attributable to the failure by commercial debtors to pay tax? Goodness me, where did the bad, commercial debt money go?

  • rate this

    Comment number 253.

    "CAN greed be regulated?"
    "In a sense", yes: it has been, is being, will be...

    BUT if we duck the (rhetorical) first question (from millennia of adverse experience a negative inescapable), we have to address not so much 'effectiveness' as 'adequacy of regulation', and 'in whose judgement?'

    Back to choice, denial inherited & enforced: "of, for, by" the Equal or the Unequal partners?

  • rate this

    Comment number 252.

    In these circumstance one wonders about the relevance of the Mortgage Guarantee Scheme, the second strand of the Help to Buy.
    MGS will result in higher interest rates and if lenders insist on higher deposits the number of borrowers who will be offered a 95% mortgage is likely to be very few.
    At least the equity loan scheme was linked to increasing supply.
    MGS should be terminated.

  • rate this

    Comment number 251.

    @248 All for All "we'd agree Equal Partnership"

    You and I might, I more in theory than in practice, but collectively we shall never even agree what it means, let alone that it would be for the best in the best of all possible worlds, or that a reasonable facsimile might be contrived in the real world. Meanwhile, real Co-op customers may need effective "resolution" from a serious Bank of England.


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