Homeowners are facing a rise in mortgage costs even without an increase in the official interest rate after the Bank of England pulled the plug on a scheme that has pumped tens of billions of pounds into banks to help fuel lending.
The Bank said last week its Term Funding Scheme would end in February. About £78 billion has already been lent and the figure is poised to soar to £115 billion by the time the TFS is terminated.
The scheme slashed the cost of funding for banks, meaning interest rates for a 75 per cent loan-to-value fixed rate mortgage have dropped by as much as 0.5 per cent since the TFS was introduced last August.
Mortgage shock: The Bank of England said last week its Term Funding Scheme would end in February
Top bankers and economists have warned that withdrawing the scheme would push up mortgage rates even if the base rate remains unchanged.
The Bank of England last week held interest rates at 0.25 per cent and a rise is not widely expected until well into 2018 at the earliest.
Banks typically pay a higher rate to retail savers or to borrow money on financial markets, but the TFS has been charging lenders just 0.25 per cent as long as they maintain or expand their net lending.
Samuel Tombs, UK economist at Pantheon Macroeconomics, said: ‘When the TFS was launched, raising funds from wholesale markets or from retail depositors for a similar period cost banks around 1 per cent. As a result, banks have borrowed from the TFS enthusiastically.’
Banks withdrew £79 billion from the Funding for Lending scheme – the TFS’s forerunner – over a four-year period. They have withdrawn almost as much from the TFS in the last 12 months.
Antonio Horta-Osorio, chief executive of Lloyds, said earlier this month that the end of the scheme could hit mortgage rates.
‘I think that the TFS closing and the fact that the challenger banks took a very significant chunk of it versus their own balance sheets will make them rethink their strategy.’
Figures from June show that Metro Bank and mortgage specialist Charter Court have drawn the largest amounts relative to their overall lending. TSB, Aldermore and Shawbrook are also big users in relative terms.
RBS had drawn £14 billion from the scheme up to last March making it the largest single user.
Ray Boulger, a mortgage broker from John Charcol, said the TFS has been keeping mortgage rates low. ‘If you go back pre-credit crunch, the bank rate was the only significant weapon the Bank had,’ he said. ‘Now they have got a lot of other options.’
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