Banks in England will be forced to increase mortgage rates. This comes following a warning issued by one of the country’s biggest investment managers, as cheap money provided by a closed Bank of England scheme runs out.
Why Will Mortgage Rates Be Affected?
The Bank of England launched the £127 billion term funding scheme (TFS) back in August 2016. The aim was to provide lenders with low-cost loans as an economic stimulus after the Brexit vote. The scheme closed in February 2018 and as a result, M&G Investments believes that lenders will be forced to increase mortgage rates due to the higher costs. As banks wean themselves off TFS funding, it will lead to higher mortgage rates for customers.
Was TFS Funding Popular?
The TFS was rather popular and subsequently, the Bank of England requested two extensions. However, lenders didn’t take up all the money they were eligible for in the final round.
All of Britain’s high street banks took advantage of the scheme. In particular, Lloyds Banking Group were particularly fond of the scheme, borrowing almost £20 billion overall. This was ahead of the Royal Bank of Scotland with £19 billion. Nationwide and Barclays used £17 billion and £12.6 billion respectively.
Smaller, challenger banks were some of the most fervent users of the Bank of England scheme. Metro Bank has borrowed almost £4 billion, whilst Virgin Money has drawn down just below £6.9 million. Now that the scheme has ended, they will need to find an alternative source of funding.
What Will Happen Now?
Between September 2016 and December 2017, the TFS provided a net injection of £68 billion to banks at rates of 0.35% to 0.6%, which is just above the bank’s own base rate. The loans have a four-year maturity from the point of draw-down. As a result, by 2020 and 2021, banks will struggle to re-finance themselves. Lenders are now trying to get ahead of these refinancing walls and are set to issue longer maturity RMBS (residential mortgage-backed securities) paper.
There are many ways that banks fund their mortgage books. Usually, banks use their depositors’ money, as well as long-term debt. RMBS sales involve lenders packaging blocks of loans and selling them to private investors. This will free up capital which can then be used to make new loans.
