BoE prompts worries of future mortgage drought

The Bank of England renewed concerns over the future availability of mortgages after confirming that the Special Liquidity Scheme (SLS) which has helped lenders fund mortgages during the credit crisis will end in January 2011 as scheduled.

The SLS and the Government’s credit guarantee scheme have between them plugged a £300m ‘funding gap’ which has arisen because the securitization markets, where lenders used to go for a lot of their funding, have all but closed since the crunch started in late 2007.

When the SLS ends, it is feared that the provision of mortgages may dry up and the interest rates charged on those deals that are available will increase.

Sue Anderson of the Council of Mortgage Lenders said that banks who had borrowed from the schemes would have to start repayments from next year and warned:

"The mortgage market will have to shrink unless lenders are able to raise funds from other sources."

She said even if they did find funding alternatives, the cost of mortgages would rise, and first-time buyers could bear the brunt of any mortgage rationing.

The CML calculates that it would take nine years for the funding banks and building societies can gather from retail deposits (savings) to fill the gap that will be left following the withdrawal of the State funds.

Ray Boulger, senior technical manager at mortgage broker John Charcol said there would be negotiations over the continuation of the scheme.

"If you suddenly have a whole load of cash taken out of the market that's going to put us back quite a long way and I am sure the Bank of England don't want that," he said.

"The last thing the Bank is going to want is for property prices to fall back again because that is going to undermine banks' balance sheets."

But he added that is UK property prices should increase unexpectedly strongly this year, the Bank could use the end of the SLS as a way of preventing another bubble.