Funding for Lending scheme great news for home owners

With banks and building societies about to start drawing down the first tranches of £80 billion made available by the Government – in its Funding for Lending scheme – to boost small businesses and households, homebuyers might already be feeling some benefits,

The scheme, which begins on August 1, is incentivised, so that banks who issue more loans will get cheaper funding. Others which fail to use the scheme to expand lending will have to pay more.

Ray Boulger, at mortgage broker John Charcol, says: "The scheme means banks can step up mortgage lending, which many regard as safer than lending to small businesses, without having to worry about the rates they must pay on wholesale money markets."

Of course, nobody knows the likely impact on the housing market: will banks make a priority of helping borrowers with small deposits, or will they cut risks by helping borrowers with large deposits, or perhaps help buy-to-let investors?

Different lenders may well focus on different parts of the market.

Even at this stage, however, the mere promise of extra money appears to be improving market sentiment. In a depressed mortgage market, most lenders want to safeguard their own market share.

During July, leading lenders have been proactive in pushing fixed rates for mortgages gradually down.

The Royal Bank of Scotland (RBS) slashed rates on its fee-free five-year fixes – with 90 per cent loan-to-value (LTV) limit – from 6.49 to 4.79 per cent. Under the NewBuy scheme, the loan is available with a 95 per cent LTV.

RBS also offers a two-year tracker at 2.99 per cent above the Bank of England base rate – payable 3.49 per cent – with an LTV limit of 75 per cent, which runs until the end of October 2014 and then reverts to a standard variable rate, or four per cent. Early repayment charges apply on this package.

Meanwhile, HSBC has countered with its lowest ever five-year fix – just 2.99 per cent, provided borrowers have deposits – or equity – of 40 per cent of the price. The arrangement fee is £1,499.

Santander is matching the deal, but its 2.99 per cent rate is available only to existing current account and mortgage customers.

Michael Ossei, personal finance expert at comparison site uSwitch.com, says: "This new fixed-rate mortgage from HSBC is great news for homeowners looking for security and protection against future rate rises.

"Although it may be another year before the base rate rises, the only way for mortgage rates to go in the long term is up.

"Increased competition in this part of the mortgage market could also lead to a further fall in the fees and rates for longer-term fixed mortgages, meaning that those who want to budget and prepare themselves for an increase in rates won't be too heavily penalised."

At Northern Rock, a reduction of up to 0.2 per cent on two- to five-year fixes means rates start at 3.45 per cent, with a £999 fee. For buy-to-let investors, three- and five-year fixes fall by up to 0.36 per cent.

Barclays has also lowered six fixed-rates mortgages by up to 0.30 per cent, with a market-leading two-year package at 3.29 per cent, with no application fee for customers buying a house at 70 per cent LTV.

The cuts include a drop of 0.3 per cent on the five-year fixed rate at 70 per cent LTV with a rate of 3.99 per cent, the lowest five-year deal Barclays has offered this year.