Enterprise Finance predicts post-Brexit secured lending hike

The firm said Britain’s decision to leave the European Union, handed down on 24 June, could lead to more people buying secured loans in a bid to consolidate other forms of debt.

It also said fundamentals of the housing market remained sound, meaning second charge lenders could benefit from people wanting to upgrade their homes.

Enterprise Finance’s comments came as it released its first annual Second Charge Report, replacing its former Secured Loan Index, which detected a 19% dip in lending activity in April compared with the previous year.

The firm said the decline in monthly lending was caused by disruption following the implementation of the EU’s Mortgage Credit Directive (MCD) in March, as lenders focused on embedding new systems and training staff on how to deal with MCD regulations.

The new regulation saw second charge lending treated similarly to mortgages, allowing advisers to sell them directly, effectively eliminating the need for master brokers.

The report drew on data from the Finance and Leasing Association (FLA) to analyse the market over the past few months before predicting future development in a post-Brexit world.

It looked at the months February to April and found a 41% fall in secured lending month-on-month.
But Enterprise Finance said the decline was exaggerated by high March figures, when lenders rushed through existing deals before the new rules came into place.

The decision to maximise business before the new legislation led to record £86m lending in March, it said. Lenders then paused to take stock and rebuild pipelines in April, it claimed.

While monthly lending declined, gross annual second charge lending surged, the survey said. For the 12 months to April 2016, total lending stood at £886m, up 29% on the previous year, it added.

The firm also found the size of the average second charge loan had risen 14% over the last four months. With typical loans sizes remaining over £60,000, this suggests using secured finance for larger projects was a long-term trend that may well continue throughout the year, it said.

The average loan-to-value ratio on the products increased to 60% from 59% in January, according to Enterprise. The ratio had seen a significant fall to 51% in March, but this appeared to be a short-term dip, rather than part of a larger trend, the firm said.

Enterprise Finance said the Brexit-induced high levels of uncertainty would play into the hands of second charge lenders as borrowers are encouraged to consolidate their debt to make their payments more manageable. They would also be looking for products offering lower interest rates than their credit cards, especially if the Bank of England cuts the base rate further.

Consumers have been increasingly reliant on unsecured debt as a source of finance, according to recent Bank of England figures, which showed consumer credit had risen £1.3bn month-on-month in April.

It also predicted higher borrowing levels for home improvements as people shy away from selling their houses and instead upgrade what they’ve got.

This was despite indications from the commercial property market that the sector has been hit hard by Brexit. For instance, several investment funds with significant commercial property portfolios have suspended trading after the result of the vote became clear.

However, the comments were at odds with early indications, which suggested lenders were not as keen to part with their money in the current market.

For instance, short-term lender Borro said earlier this week it has temporarily stopped second-charge and higher value and LTV mortgage lending through brokers amid the post-Brexit chaos, with plans to review the decision in autumn.

It had told its key broker partners lending on property would be severely restricted. It would continue to lend on just first-charge mortgages and cap all lending at 65% loan to value and £500,000, which would be targeted at London and the south east.

Enterprise Finance sales director Harry Landy said: “It is too soon to say what the full effect of the decision to leave the European Union will involve. While lending volumes could decline, the EU referendum doesn’t compare to the last recession when there was a liquidity crisis, followed by huge tightening of risk appetites, which stopped lending dead. Post-vote, deals are still going through and for most lenders it is a case of business as usual.

“The fundamental drivers of demand for second charge loans are still in place after the EU referendum. Borrowers will continue to need secured finance for debt consolidation and home improvements – the sector’s bread and butter.

“There may also be more opportunities for lenders, should high-street lending decline. However, lenders will have to be responsible, given the uncertainty in the market. This means we may see a decrease in the average loan-to-value ratio, to ensure lenders minimise exposure to any future economic shocks.”