Still no return to cheap secured finance
Tuesday, 08 Jul 2008 09:00
Despite calls by the Association of Finance Brokers, banks and building societies appear to responding very cautiously to any encouragement that they start lending to each other once again to unblock the battened-down lending markets. The Association – which represents secured loan brokers – added its weight to such appeals at the beginning of May, but there is so far little sign that lenders have responded at all enthusiastically. Until they do, a return to the days of cheap secured finance must remain some way off.
Commenting on the Bank of England’s first quarter “Financial Stability Report”, the Association nevertheless noted the Bank’s assessment that some mortgage backed securities now “look cheap” and that such “triple-A rated securities” represent sound investments. If confidence can be restored amongst institutions to start lending to each other once again, then this would increase the supply of funds available for lending in the market generally.
Such stories are relevant to the individual consumer because they touch on something at the very heart of the credit markets – the question of confidence. Confidence in the ability of any borrower – whether that is a big institution or a private individual – to repay a loan is what makes the lender prepared to lend and the rate of interest at which the loan can be made available. When confidence has suffered, as the result of the recent credit crunch for example, then this spells a general shortage of funds available for lending and the reduced supply leads to higher prices.
What this means for the private, individual borrower is that cheap secured loans are likely to be made available only to those applications with a reliable and highly-regarded, or rated, form of security to offer against the loan. The most highly regarded of these and the form of security most likely to attract cheaper secured lending is the borrower’s own home.
For homeowners, therefore, it remains possible to obtain relatively cheap secured finance. Clearly, the greater the homeowner’s equity in the property, the more confident the lender is likely to be, the easier it should be to secure the loan and the cheaper the rate of interest repayable. Since this provides one of the best routes to finding the cheapest secured loans available, it is also a very useful way of raising finance for debt consolidation, for example. This allows the borrower to make use of the cheaper secured finance in order to pay off an assortment of more expensive unsecured loans and roll them all up into just the one outstanding loan.