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The decision to scrap the Funding for Lending Scheme (FLS) will quickly force up mortgage rates from today's artificial lows, brokers have warned.

Bank of England governor Mark Carney announced yesterday that FLS would no longer apply to household lending from February, claiming this would prevent another housing bubble.

Brokers have warned that mortgage rates could start rising after New Year, and lending could be cut back as well.

Henry Knight, managing director of broker Springtide Capital, said: "The inevitable impact of this announcement will be that we will see rates increase, as up until now they have been kept artificially low.

"Lenders will take their chunk of FLS capital right up until they can’t take anymore. We estimate that FLS funds will begin to run out during January, resulting in the rates increasing from February.  

"Those with higher LTV mortgages will continue to see their rates protected by the Help to Buy scheme, so we expect those with LTVs at 80% and below will see the largest relative increases."

Ian McGrail, managing director of broker First Mortgage, said FLS has been pulled one year too soon. "It could bring about an unwelcome increase in rates for homeowners after the first months of the year, although Help to Buy should spare those with 95% mortgages.

"Our fear is that now lending to households is set to be cut back, approval rates will fall again and cut off housing market growth at a time when it was just starting to recover. Particularly in areas outside of London and the South East that have needed the property market boost the most.

"Mr Carney has said that household lending is no longer necessary. We would urge him to look to the North of England where the impact of government supports and further bank lending is still yet to be felt."

Stephen Williams, divisional director at Brewin Dolphin Wealth management, said the move suggests the way is being prepared for higher interest rates, especially for new borrowers.

"Bank lending is likely to be a bit more cautious going forward as the banks will have to fund schemes on a commercial basis once more, using 'traditional' wholesale funding.

"Any new mortgages will only be granted at higher mortgage rates, perhaps building in a little bit of leeway if interest rates do start to move up.

"The increase in mortgage rates is likely to dampen demand, and house prices, although Help to Buy will remain a big driver."

CML director general Paul Smee played down the impact of scrapping FLS: "Mortgage lenders are well equipped to meet their funding needs, as wholesale funding market conditions have improved and retail deposits are robust."


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