The repayment of the monies withdrawn from the Bank of England Term Funding Scheme (TFS) stood out as an issue that applies to the whole market, not just building societies.
TFS was launched by the Bank of England (BoE) shortly after the cut in bank base rate following the Brexit vote. It was designed to ensure that the reduced rates were passed on to households and businesses. Lenders have borrowed around £127bn of cheap money that must be repaid by the end of 2021.
This will present a funding challenge to several lenders and is likely to have a negative impact on borrowers as any increase in the cost of funds will need to be passed-on.
Will the confusing economic situation delay TFS repayments?
Independent forecasts compiled by HM Treasury show an upward trend in the official bank rates to more than 2% by 2022.
This coincides with Office for National Statistics/BoE figures showing an explosion in total consumer credit lending to households and a rapid decline in savings ratios – the buffer that households rely on to navigate volatile financial markets.
It is not surprising that the most recent minutes of the bank’s financial policy committee (FPC) highlights an increasing concern around UK banks’ capital buffers. At the same time, some of the bank’s rate-setters are calling for rates to rise faster than markets anticipate.
Against this, various economists have warned that, “central bankers will have to cut interest rates into negative territory, do more quantitative easing or dream up entirely new policies to combat even a mild recession in the future.”
This view has been supported by BoE governor Mark Carney recently, when he suggested quantitative easing measures could be turned back on if the results of the ongoing negotiations result in a “disorderly” Brexit.
Although optimists hope the current economic uncertainty may result in a ‘son of’ TFS, in the same way that TFS was the ‘son of’ FLS, responsible lenders are already planning a way through the funding challenge.
The funding lines available
That challenge impacts all types of lender. Those that are predominately funded through wholesale funding are seeing a steady increase in Swap rates and retail savings-based lenders are having to pay more to attract savers’ funds.
The savings market is already becoming more multifaceted as challenger banks start to tap into it to source funds at competitive rates. However funded, all lenders are seeing a steady increase in the weighted average cost of funds. Such an increase will impact in two ways:
1) Mortgages will cost more. The simple calculation is the increasing cost of funds needs to be recovered from the users of those funds, and
2) There is likely to be a further drift up the credit risk curve as lenders try to obtain a better margin from riskier products, although the BoE will attempt to control lenders’ risk appetites.
Both outcomes will result in a fast moving, increasingly competitive market, in terms of price and criteria.
Mortgage brokers in the driving seat
Such an environment plays into the hands of mortgage brokers who have access to the whole of the market. They need to be focussed on market complexities as they develop and prove their worth as experts, not simply mortgage placers.
Like the period from 2004 to 2007, there has been an exponential growth in the number of lenders and products available. This trend continues and consumers are finding it increasingly difficult to find their way through the maze to an appropriate product for their needs.
The development of sourcing solutions to include more robust criteria specific searches will further help mortgage brokers add value to their customers. But it is the true expert that will gain competitive advantage.
Rockstead is a lending consultant offering due diligence on loan portfolios and businesses in the financial services sector.