When the credit crunch took hold many banks in the UK – and indeed the world – ran for cover.
After lending to practically anyone for several years they suddenly became quite shy. Most battened down the hatches and decided almost every customer, from buy-to-let landlords to first-time buyers, were just too risky. As such many of them almost forgot to actually do any lending.
It is because of this that first-time buyers have found themselves left out in the cold, desperate households have resorted to seeking help from somewhat unscrupulous pay day lenders and businesses, in need of finance to expand or secure deals, have failed.
Now, almost five years since the crunch first took hold the Bank of England has decided to do something to help. On July 13 it launched the Funding for Lending Scheme.
What is the Funding for Lending scheme?
The scheme has been designed to encourage banks to lend to households and businesses. It works by allowing banks and building societies to borrow from the Bank of England for up to four years. They will only pay 0.25% interest on the loan (a very cheap rate indeed) as long they increase the amount they lend to individuals and businesses. If they decrease their lending then the interest rate on the loan from the Bank of England will rise. In short, the more they lend to borrowers, the more they can borrow themselves from the Bank (at that very attractive interest rate).
How will it help?
The reluctance of banks to lend has had some drastic effects on both individuals and the economy. First-time buyers, for example, where once the lifeblood of the mortgage market. But since the credit crunch lenders have deemed them too high risk to lend to, often requiring unfeasible deposits before even considering lending. Whilst this has obviously hampered first-time buyers’ dreams of owning a property it has also had a knock on effect on second time buyers (or second steppers as they are often called) who want to move up the property ladder but need first-time buyers to purchase their current house.
Businesses have also been affected. Since the economy stalled David Cameron and politicians the world over have told us it will be entrepreneurs and small businesses that will pull us out of recession. However, lenders, it seems, did not get the memo. Small businesses have never found it so difficult to access finance. The Funding for Lending scheme, in theory, will change this.
What’s wrong with it?
The scheme has been widely welcomed in the finance world. Critics have claimed it may not go far enough and questioned whether enough banks will show enthusiasm for it to have any real impact but the general consensus is it’s a step in the right direction.