'Funding for Lending' to make loans 'cheaper and more available'

By Helen Gradwell

The Funding for Lending Scheme - which will start in August and last for 18 months - is designed to make loans and mortgages more available, as well as cheaper. It works by allowing banks and building societies to borrow at a lower rate (0.25%) over four years - encouraging them to pass the savings on to individuals and businesses. The BBC tells us more.

It has come about because there's been a drop in lending of 16% since 2008. It also aims to bring mortgage rates down - as they have risen by around 0.5% in the last year. Initially, banks will be allowed to borrow 5% of the amount that they currently lend. Lending more will allow them to borrow more.

The Bank of England and the Treasury said: "For every pound of additional real economy lending an institution advances, an additional pound of access to the scheme will be permitted for that institution."

However, Graeme Leach, from the Institute of Directors, told the BBC that: "The banks may not pass on all that cost advantage; they may just take it on wider margins."

There are also penalties in the scheme. If financial institutions still cut the amount they lend - despite the fact that funding is cheaper - the Bank of England will charge them more (up to 1.5%). Every three months, the Bank of England will publish how much has been lent to households and businesses.

Policy director of the British Chambers of Commerce, Adam Marshall, said: "We will be watching closely to see if this has any positive impact for new and growing businesses, which have largely been frozen out of the market for finance in recent years."

Image © iStockPhotos / John Pavel

Tags: Funding for Lending Scheme, loans, lending, Bank of England, Treasury

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