This week the Government has pledged to plough £50 billion into the British Banking system as part of plans to ease the credit crisis. The plan means that banks can swap up to £50 billion in mortgage debt in return for government debt which can then be traded. Alistair Darling, Chancellor of the Exchequer, has urged banks to cut mortgage rates and to help people who face difficulty when their fixed-rate mortgages end. The government was keen to stress that they were not encouraging lenders to return to the wild lending that occurred previously, but to restore confidence.

The credit line is the biggest loan the Bank of England have ever put into the British Banking system and is a clear sign that they are keen to do all they can to ease the crunch. In many ways this loan could be seen as the end of the crisis, or at least something to tide the country over until it fully subsides.

However, many critics are claiming that it is just not enough to end the crisis alone. Mortgage lenders have warned that rates for new borrowers were highly unlikely to be reduced despite the cash injection. This means that first time buyers or those on a low income will still be unable to get onto the property ladder and people struggling to pay a high rate mortgage will most likely have to continue to struggle. A spokesperson from the CML said: “We welcome the action that the Bank of England is has taken to address the funding shortage. This injection of liquidity should ease funding conditions for mortgage lenders. But the how LIBOR responds to this scheme will be crucial in reversing the trend of mortgage products being removed and higher mortgage pricing.”

It seems that for every step forward that is made, there are always three back as banks are still behaving in a self-preserving, cautious manner. In terms of confidence, the size of the loan is a clear sign from the government that they are doing all they can to avert a recession or a crisis of bigger magnitude. However as the media have become fixated on the credit crunch, it seems unlikely that confidence will grow until positivity is a certainty and is publicised.

Rachel Bancroft, managing director of KGB Packaging, commented: “The Chancellor is reported to be urging mortgage lenders to hold back on repossession. However, as Michael Coogan of the CML has pointed out, none of the £50 billion from the Bank of England is accessible by smaller building societies or niche lenders. The largest proportion of those in danger of repossession are sub-prime borrowers that can no longer re-mortgage to consolidate their debts. There is huge demand out there for niche and sub prime mortgages, and we need to see some help with liquidity at this end of the market, so that brokers can start to place these cases again.”

Grahame Crewe, Finance Director of Magic Loans, said : “Banks being banks will use the opportunity to use somebody else’s money to make money, that is what banks are in business for and the days of cheap and easy credit are fast becoming a distant memory. It may the end of the credit crunch for the banks but the Jury is still out as to the wider economy, let alone some sort of improvement in the secured loan market. Business as usual for secured loans is far away, maybe as far as 3-5 years.”

For now, the £50 billion will be seen by many as merely a bandage over the wound. Whilst the loan may mean that the crisis gets no worse, it may in turn mean that it gets no better. Join in the debate on our forum by clicking the link below:

https://www.bridgingandcommercial.co.uk/forum/showthread.php?p=9#post9

Lucy Trueick