Government deal could mean cheaper mortgages

A new, £80bn Government scheme designed to encourage banks and building societies to increase lending to businesses and households could cause mortgage rates to tumble.

The joint Bank of England and Treasury initiative, called Funding for Lending, was launched this week to shield banks from higher funding costs as a result of the eurozone crisis, to allow them to lend more.

From next month, banks will be able to access up to 5 per cent of their existing loan books through cheap funds, meaning the scheme could hit £80bn if all eligible lenders take part.

The ultimate cost will be around 0.75 per cent a year, including fees, which is repayable over four years. That's around 1 per cent cheaper than the rate at which most banks can currently borrow.

If banks increase their net lending levels they will be able to borrow more at the same rate.

However, that cost could double for any banks which shrink their loan books.

Barclays, Lloyds Banking Group, Royal Bank of Scotland and Nationwide Building Society have signed up to the scheme so far.

Ray Boulger, senior technical manager at mortgage broker John Charcol, said: "I expect to see mortgage rates fall by 0.25 per cent to 0.5 per cent on average over the next month," he said. "And because the loans are repayable over four years it would be easy for banks to fund five-year fixed rates," Mr Boulger added.