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Term Funding Scheme to close

The drawdown period for the Term Funding Scheme (TFS) will close as planned on 28 February 2018, the Bank of England has confirmed. After a slow start, with only one bank drawing funding in Q3 2016, the Scheme has now seen banks and building societies draw a total of almost £79.6bn in the period up to 2 August 2017.

In total 26 building societies registered for the Scheme, of which eleven have so far utilised the facility. This includes eight of the ten largest societies. Building societies using the Term Funding Scheme have all increased net lending over the period, meaning there won't be extra fees to pay assuming this persists.

The Bank conceived TFS with the purpose of reinforcing 'the transmission of Bank Rate cuts to those interest rates actually faced by households and companies.'[1] Since July 2016 – prior to the announcement of the scheme - Bank of England figures show that, on average, rates on:

  • A new 75% LTV 2 year fixed rate mortgage have fallen from 1.72% to 1.42%
  • A new 75% LTV 2 year variable rate mortgage have fallen from 1.72% to 1.42%
  • Standard variable rate mortgages have fallen from 4.55% to 4.28%

Looking at figures up to March 2017 shows that challenger banks have been the most enthusiastic users of the TFS, as a percentage of their Borrowing Allowances. Compared to their net lending figures, it appears a number have used the scheme primarily to replace other wholesale funding sources, though they may lend out this money in future. The end of the scheme may therefore have the greatest effect on this segment of the mortgage market.

If the overall rate of drawings continues, then it is expected the Bank will exceed the £100bn threshold it initially conceived for the scheme. Indeed, in a letter to the Chancellor, Governor Mark Carney requested a £15bn increase, which Philip Hammond duly authorised.

 

[1] http://www.bankofengland.co.uk/publications/Documents/inflationreport/2016/aug.pdf

 

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Posted by Charlie Blagbrough on 28 August 2017