FLS fails to ignite property market as consumers pay back debt

The Bank of England’s new initiative to try and breathe some life into the UK property market has failed in the first month, according to official data.

The Funding for Lending Scheme (FLS) aims to provide cheaper credit to banks and other lenders that is passed onto consumers as cheaper loans and better products for the UK mortgage market.

However, Bank of England figures show that in the first month of the scheme borrowers repaid existing debts rather than taking out new loans and rates continued to rise.

It seems that the demand for credit is not there as consumers focus on paying back existing debts during a double-dip recession.

The FLS provides state-backed cheap funding for banks. They can borrow money at cheaper than normal rates on the wholesale market as long as they pass on the cheaper borrowing to residential and business customers.

Last week, the Bank of England revealed that 13 lenders had signed up to the scheme qualifying for a combined £60 billion of subsidized lending.

Although it is early days for the scheme and its effectiveness and impact cannot be fully judged yet, the data makes for disappointing reading for the government and the central bank as it tries to help low-equity borrowers and first-time buyers onto the property ladder.

The figures from the Bank of England show that households repaid £276 million of mortgage debt and wiped out another £134 million of personal loans.

Meanwhile, lending to businesses slipped by £2.2 billion, the biggest monthly fall since February.

The average fixed mortgage rate rose by 0.03 per cent and has now increased by 0.52 per cent since the start of the year.

Howard Archer, Chief UK & European Economist at IHS Global Insight UK economist, said: “The Bank of England data indicate that consumers appetite for new taking on new borrowing is limited while there is also an ongoing strong desire of many consumers to reduce their debt.”