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The end of Funding for Lending? Not just yet

A lot has been written and debated about the affect the Government’s Funding for Lending Scheme has had on interest rates since being introduced in July 2012. It has been accused of stagnating saving rates and hitting saver’s pockets hard by providing cheap funds to banks to allow them to make cheaper loans to consumers and businesses using less of their own or savers’ money to fund the loans.

The Bank of England and its Governor Mark Carney, made a surprise announcement at the end of November through its half-yearly Financial Stability Report (FSR), that the Bank will be shifting the focus of FLS to offer business loans only come 2014 and will not help fund mortgages from banks any longer. FLS has had a two prong approach as it has been focused on lending around £80bn in credit by the BoE to banks and building societies for mortgages via Help to Buy and other business initiatives for loans.

This change according to some experts is a swift reaction to prevent a housing bubble with property prices spiralling out of control in some regions.

So what does this mean for savers? Well, to keep things short, in theory nt could lead to a rise in rates for both mortgages and savings as banks would no longer have access to cheap credit from the Bank of England. This means banks would have to fund their lending themselves from the saver money on deposit, so both rates to borrowers and to savers might rise even without an increase in the Bank of England base rate. That said, we are unlikely to see a sharp increase any time soon but it could mean good news for savers and bad news for borrowers over time.

Lending through Zopa already delivers savers a return much higher than bank savings accounts. If personal loan rates offered by banks rise, rates on Zopa for savers and borrowers would also rise, as the tracker rates on Zopa are linked to the UK personal loans market. But Zopa is a much more efficient business than banks. With our smart technology, and with no costly branches or banker bonuses, Zopa can continue to offer great, competitive rates to both borrowers and savers whatever the financial weather.

We are by no means macro-economic experts here at Zopa, so have provided the best analysis from the best economic reporters below for you to digest.

BBC – Robert Peston

Guardian – Jill Treanor

Telegraph – Andrew Oxlade

FT – Chris Giles, Sam Fleming and Claire Jones

Daily Mail – Ed Munk