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Government Launches Funding for Lending Scheme

A new scheme known as Funding for Lending, which is set to encourage banks to lend more to small businesses and individuals, is being launched today, with the hope that it will help turn around the recession.

The scheme will see the Bank of England make more money available to financial institutions at below market rates, which they can in turn pass on to consumers. All progress of the money that is lent will then be monitored by the Bank, in order to ensure the effectiveness of the scheme.

Funding for Lending, which according to the Bank of England, is “designed to incentivise banks and building societies to boost their lending to UK households and non-financial companies”, will target growth in the housing market as well as amongst small businesses.

It is hoped that this will make it easier for first time buyers - who will get lower mortgage rates, to purchase a house, and this will help to turn around the downturn witnessed in the price of housing throughout the UK in 2012.

Currently the lowest mortgage rates are only available to those who are able to afford a 40% or more deposit on a house, despite recent cuts in rates from some mortgage lenders.

The scheme will work by initially allowing banks and building societies to borrow up to 5% of the amount they lend. The interest they are charged on the loan will be set at just 0.25%, and more than 5% of the amount they lend will be made available to them if they can prove their overall lending has increased. If they are found to have decreased their lending then the interest rate on the initial loan will be hiked to 1.5%.

This comes after official figures show that lending to small firms and non-financial companies has decreased by 17% over the past four years, something that the Bank of England is keen to turn around.

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