An increase of 0.25% in mortgage rates is looming, with rates on savings accounts to also rise by the same amount. This is due to the expiry of an extraordinary financial measure called the Term Funding Scheme

The scheme was intended to boost the financial system after the referendum on the UK exiting the European Union. It worked by extending credit to banks and building societies from the Bank of England, for very little cost. Unsurprisingly, financial entities were very keen on the offer, resulting in borrowing of £106 billion under the scheme.

The vast majority of eligible institutions took advantage, from the Holmesdale building society (£4 million) to big names like Virgin Money (£4.2 billion).

The availability of this cheap funding reduced the need for financial institutions to offer attractive deposits. The current state of affairs will end on the 28th of February, as the money that has been borrowed by banks under this scheme will need to be repaid. This will mean that banks will have to offer more attractive rates to customers in order to  bolster their positions. 

Smaller banks and building societies will most likely to move first to offer better rates, forcing the larger institutions to follow suit. 

Paul Richards of Insignis Cash Solutions says: 

“It’s likely we will see a 0.25%-0.5% increase in longer-term savings rates over the next 12 months and potentially up to 1% over the next 24-36 months, which could leave a one-year term account getting close to the 3% level.”

According to some mortgage lenders, it is anticipated that there will be an increase in rates of at least 0.25%. possibly more if savings rates increase by a higher rate then anticipated. (Patrick Collinson, Guardian, January 2018). 

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