Estimates for net lending to consumers from 2014 through 2015 were generally positive early last year (2016). Based on good numbers reported by the Bank of England, it appears as though the upward trend will continue through 2016, particularly in the area of secured loans. Market stresses have been kept in check over the last 12 months, and lenders appear more eager than ever to make money available to consumers.
The Bank of England Trends in Lending report from January 2015 showed that average monthly net lending flow among UK mortgage lenders was slightly lower in the three months ending November 2014 when compared to the previous three-month period. A total of £1.8 billion was loaned during that term. However, the total volume of secured lending to individual consumers was up by 1.9%.
Even more promising than the raw numbers relating to secured lending is the fact that such lending continues to increase even as mortgage approvals are in decline. Again, we look at the Trends in Lending report for evidence of this trend. During the last few months of 2014 the total number of mortgage approvals among UK lenders specifically for house purchases was lower than at the beginning of the year. Approvals at the end of November were also lower than they were at the same time in the previous year.
Despite fewer mortgage approvals, secured lending still increased. This demonstrates an encouraging trend: while first-time buyers may be finding it harder to secure mortgages, existing homeowners are still able to leverage their equity to obtain secured loans.
The Bank of England's January 2015 report forecast a strong year for secured lending, predicting increased gross lending through the end of last year and into 2016. Although hard data is still not available, preliminary indications suggest predictions have been accurate. Secured lending appears to remain strong.
Certain market stresses are known to have an impact on overall mortgage lending, and secured lending in particular. Market stress, often measured through mortgage arrears, seems to be having little impact on the secured lending practices of UK mortgage lenders. The Bank of England's 2015 report makes it clear that mortgage arrears are expected to continue trending lower as the economy recovers. Total consumer credit, however, is another matter.
Average net consumer credit flow at the end of 2014 stood at £1.1 billion, excluding student loans. That total was slightly higher than the previous quarter. Furthermore, official numbers from the second half of 2015 indicate that consumer credit is at an all-time high in the UK, fuelled mainly by credit card use. If there is anything that could put a damper on secured lending, this could be it.
On the other hand, increased credit card spending tends to lead to greater secured lending flow as consumers seek to use the equity in their homes to retire high-interest credit card debt. While credit card debt itself is not necessarily good for the consumer, having access to secured loans is beneficial to both the consumer and lender.
While we await the data from 2015 and early 2016, one question remaining is how market competition will be affected by consumer borrowing habits. A typical scenario would see competition increase as the demand for financial products increases. We expect the same to apply to secured lending through this year. But competition may remain artificially low as long as the Bank of England refuses to adjust the base rate higher.
The reason behind this is the reality of lower profit margins. With interest rates remaining low, there is less incentive for lenders to aggressively pursue borrowers. When rates and profits rise, lenders want to get cash into the hands of as many consumers as possible. This market reality is even more profound under the current circumstances due to the incredible rise in property values since 2012. More people have greater equity as a result, but lenders are not making more profit off secured loans as a result. It is all the more amazing that secured lending continues to grow as things now stand.
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