Mortgage blog: Rates set to rise as government moves to stop house price bubble
The era of rock-bottom mortgage rates could be set to come to the end after the Bank of England announced it was scaling back a scheme that had been supporting the UK mortgage market. The new Governor of the Bank of England, Mark Carney, has announced that the Funding for Lending scheme will cease for mortgage business from 2014 in an attempt to cool house price rises.
The scheme has helped mortgage borrowers by driving down the cost of borrowing to record lows. So, is the withdrawal of the scheme set to result in increased mortgage rates?
The Funding for Lending scheme has been providing lenders with access to low-cost funds since its launch in summer 2012. In return for increasing lending to homeowners and small businesses the Treasury has been providing cheap funds to lenders and they have been able to offer unprecedented rates of borrowing.
Now, Funding for Lending is to be restricted to small business lending. This means that banks and building societies will no longer have access to cheap government funds for mortgages.
Bank of England Governor Mark Carney said: "Over the past year the Funding for Lending Scheme has contributed to the recovery by helping to significantly improve credit conditions, especially for households. The changes announced today refocus the Funding for Lending scheme where it is most needed - to underpin the supply of credit to small businesses over the next year - without providing further broad support to household lending that is no longer needed."
The Daily Mail reports that the change to Funding for Lending "is significant as it has the potential to make mortgages more expensive for lenders to fund, meaning higher mortgage rates down the line".
Keith Osborne, editor of Whathouse.co.uk, says: "Many lenders still have an unused Funding for Lending allowance and can still draw down funds cheaply. This means that there may not be an initial spike in the rates that borrowers are being charged but I expect that rates will start to creep up when government help finally disappears."
Since the launch of Funding for Lending mortgage rates have fallen to record lows. Two year fixed rates have fallen to around 1.5% while five year deals have been available at just 2.5%.
"It does look as if rates have finally hit rock bottom," adds Osborne. "So, if you've been thinking about remortgaging for a while I'd suggest that now was the time to consider finally taking the plunge."
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