EU exit could be an opportunity for second charge

The decision to leave the European Union could provide opportunities for the second charge market in the coming months, according to Harry Landy of Enterprise Finance.

The Enterprise sales director said that whilst it’s far too early to tell what the long-term impacts will be second charge lending is still on-going after the referendum, in contrast to the situation after the 2008 Lehman Brothers bankruptcy.

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. Some customers may take a ‘wait-and-see’ approach, postponing borrowing until the uncertainty subsides.

“However, as this won’t necessarily happen for months or years, many will want to raise additional finance sooner. Initial signs suggest this may be the case, with loans still being completed and new deals coming in.”

The decision to leave the EU may prove to yield plenty of opportunities for second charge finance lenders in the coming months. This could include an uptick in demand for secured loans, as a method of debt consolidation.

Prior to the vote, consumers were increasingly relying on unsecured debt as a source of finance, with Bank of England figures showing consumer credit had risen £1.3bn month-on-month in April.

With high levels of uncertainty, borrowers may decide to consolidate their debt to make their payments more manageable. Further, using a secured loan allows borrowers to pay lower interest rates than those on unsecured loans or credit cards, and that will continue to benefit consumers with household equity, regardless of Brexit. Should the Bank of England cut the base rate, this would also make secured finance more affordable for potential customers.

While some businesses in the property sector have been hit by the leave vote, such as investment funds with significant commercial property portfolios, the fundamentals of the housing market remain sound.

There is still a shortage of available homes compared to the number of people who want to get on the property ladder, so house prices should remain relatively stable. However, we may see fewer home sales. Homeowners may prefer to stick with their current home but invest money to improve it, rather than move to a better place. This could be good news for secured lenders, as home improvements remain one of the most popular uses for second charge finance.

Landy said: “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.”

Landy was speaking as part of the launch of the Enterprise new Second Charge Report, replacing its Secured Loan Index. This issue found that the average loan size rises to £62,864 in April, up from £54,894 at the start of 2016  whilst the average loan-to-value ratio for second charge finance increases 1% since January.

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