Funding for Lending bank scheme launched

Banks and other lenders can start borrowing cheap money from Wednesday under the new Funding for Lending scheme.

The Bank of England will lend money at below-market rates to banks, and monitor their progress in lending the cash out to firms and households.

Some lenders have already slashed the cost of their long-term, fixed rate deals.

The programme effectively replaces the current National Loan Guarantee Scheme.

But the lower borrowing costs are so far are only benefiting people with large deposits.

Aaron Strutt, at mortgage brokers Trinity Financial, said: "Most deals attractive to first-time buyers, such as those at 90% or 95% loan-to-value, have not changed yet."

According to the Bank of England, the Funding for Lending scheme is "designed to incentivise banks and building societies to boost their lending to UK households and non-financial companies".

Banks and building societies will given funding at 0.25% - far below available rates in the market - for an extended period in return for being watched on how they lend it to non-financial parts of the economy.

In the past couple of weeks several of the UK's biggest banks - NatWest, HSBC and Santander - have cut their mortgage rates to below 3% for new, five-year, fixed-rate deals.

These are the lowest long-term mortgage rates yet seen in the UK, although they are only available to the small minority of borrowers who can put down a 40% deposit.

Ray Boulger of mortgage brokers John Charcol said: "It is already clear that, in stark contrast to Project Merlin, the Funding for Lending Scheme is very quickly proving effective as far as the mortgage market is concerned."

The scheme will reportedly replace the £20bn National Loan Guarantee Scheme, launched in March, though the scheme will not be axed.

Labour's shadow Treasury minister Chris Leslie said the winding down of the previous scheme was a blow to Chancellor George Osborne's "dwindling credibility".

"Despite promises from ministers, net lending to businesses has fallen in every month of this government," he added.

"And there are serious questions about whether the new Funding for Lending scheme will really see lending to businesses become cheaper and easier to access."

The purpose of the Bank of England's scheme is not just to inject some life into the moribund property market.

Its aim is to make cheaper loans available to small and medium-sized firms, outside the financial sector.

They have complained for several years that the banks are hoarding cash rather than lending, even to relatively-safe borrowers.

Official figures show that lending to non-financial firms has indeed been falling, a trend that the Bank of England would like to reverse.

In the past four years the stock of outstanding loans to non-financial companies has shrunk by 17% from its peak, to £420bn in June this year.

Last week the RBS group, which includes NatWest, announced that it would take advantage of the new scheme.

It will cut the interest charges on loans worth £2.5bn, which it expects to make available to small and medium sized businesses.

The interest charge will be cut by an average of one percentage point, the bank said.

So far though, there is little evidence that small firms are benefiting.

"We have had no feedback yet," a spokesman for the Federation of Small Business told the BBC.