The Bank of England’s Funding for Lending scheme provides cheaper loans to households and businesses. It was launched last August, with the intention of boosting the economy by giving people access to affordable loans. That has been in short supply since the credit crisis of 2008.
The scheme gives banks financial incentives for lending to small businesses. In many cases, it has also allowed them to drop their mortgage rates. Buy-to-let landlords have already benefitted in this way. Now, the £80 billion scheme is to be expanded with extra funding. It’s hoped that the struggling housing market will benefit.
Lending to landlords
The Funding for Lending scheme has already reduced mortgage rates for both owner-occupiers and landlords. For every loan banks give to small businesses, they get funding from the government in return that can be used to help drop mortgage rates. The expanded scheme will allow banks to get funding for lending to landlords too. This funding can be used to drop rates for everyone.
According to Rob Wood, Chief UK Economist at Berenberg Bank, this is a ‘no-brainer’ for banks. He says “lend to a landlord – collateral easy to price – and get 10 times that lending back as essentially free funding, then recycle some of that back out again on mortgages or BTL”.
Improving the housing market
There are other schemes that are aimed specifically at helping the housing market. But they tend to target first-time buyers. Funding for Lending is the only scheme that does not exclude buy-to-let landlords.
Since the introduction of the scheme in August, the average buy-to-let mortgage rate has fallen significantly, from 5.09% to 4.28%. Buy-to-let lending is up 19%. With the scheme being expanded, we may well see even better figures for landlords in the coming months.
At the same time, though, the scheme has been helping first-time buyers to get on the ladder. And those first-time buyers are very often competing for the same housing stock that landlords are. Smaller, cheaper properties are often those that provide the best rental returns, as well as being the first step on the property ladder for most.
Activity is increasing across the property market. Prices are still fairly flat, but they are beginning to rise in some areas. We don’t yet know how the extra funding will affect the market over the next few months. But whatever happens, it seems that now could be a good time for new landlords to enter the market, and for existing landlords to look at remortgaging.
This kind of funding won’t be around forever: take advantage while you can of cheap mortgage rates. When the costs of everything else, from agents fees to landlords insurance, always seem to keep rising, it makes sense to take a good deal while it’s there.