A new scheme titled Funding for Lending has been created by the Bank of England with the intent to make cheaper mortgages and loans available to individuals and businesses. Initially banks and building societies that agree to the low rates will be able to borrow about five percent of the amount that they lend out.
If they decide to increase the amount they lend out to customers, than they can borrow more from the Bank of England. There is no upper limit, but it is expected that the first allocation will total up to about £80bn. The Bank of England and Treasury stated that for every pound of lending that an institution puts out into the economy another pound from the scheme will be offered to the same institution.
The eurozone debt crisis has hurt confidence in the market and has caused many lending levels to fall. This is also the result of a higher cost of borrowing, but the new scheme is aimed at solving this problem. The interest rate on new mortgages has also increased by about 0.5% over the last 12 months leading some to fear that the rising costs of mortgages will shut people out of the housing market completely.
The scheme kicks off in August and will be open to people for the next 18 months. Building societies and banks will be allowed to borrow at a rate of .25% over the next four years. This interest rate will be much lower than the current costs of borrowing off of the wholesale market. Of course, there are penalties written into the scheme as well.
If financial institutions choose to reduce the amount that they want to lend out then the Bank of England will charge an interest rate that can reach up to 1.5%. Chancellor George Osborne stated that hopefully the new scheme will help offer a lifeline to businesses and households during this challenging time.