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Bank of England scales back Funding for Lending

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29th Nov 2013
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The Bank of England (BoE) and HM Treasury have decided to scrap the Funding for Lending Scheme (FLS) for mortgage lending in an attempt to guard against the risk of another housing bubble.

Mark Carney, the bank’s governor, said the scheme would not apply to household lending from February next year, warning that rising house prices could derail the recovery.

“The recovery in the market has broadened out across the UK; the question is where does it go from here,” Carney said. “By acting now, authorities are reducing the likelihood that larger interventions will be needed. It is no longer appropriate to have our foot on the accelerator.”

The change comes at a time when property values are growing at their fastest pace since before the financial crisis following other signs of economic recovery and the government’s Help to Buy scheme.

Carney said that Help to Buy, which aims to help households move up the property ladder by incentivising banks to sell mortgages with small deposits, was not at odds with the changes.

Chancellor George Osborne said: “The FLS proved to be a successful tool in supporting the recovery. Now that the housing market is starting to pick up, it is right that we focus the scheme’s firepower on small businesses.”

Carney said they had “refocused” the FLS on business lending after a long decline in lending to businesses.

From next year up until January 2015, the household lending part of the scheme will cease and the business lending policy will allow £5 of borrowing for every pound they lend.

Banks will be able to borrow the money at 0.25pc above the BoE’s base rate, while capital relief for household lending will also be removed.

Jonathan Russell, partner at ReesRussell, said stopping the banks using the FLS to boost their mortgage lending will be good for business.

“With the banks desire for belt and braces security, the obvious way of showing Government they were lending was to lend more on property mortgages. Hopefully now this will lead to more of the lending being directed to small businesses,” he said.

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