Over the last year there have been significant changes in the lending market. At the start of 2007 the appetite of funders to provide loans or equity support for businesses seemed to be unlimited and borrowers had a wide choice of sources from which to obtain finance. Although there were signs that interest rates might increase, the general expectation in the market was that funding would remain readily available. As we know this has changed and this change has happened very quickly.

Lenders and borrowers are still adjusting to the new market conditions and this is impacting on business opportunities. Some lenders have already decided not to continue with new lending. Others are still willing to take on new business but are applying stricter terms. The net effect is that for mid-market transactions, although there are still plenty of lenders willing to provide loans, the terms are likely to be less favourable to borrowers.

This situation has come about as over recent years lenders have found that they could make more profit from originating loans than holding long term debt. In many cases it was also more cost effective for lenders to obtain funds through the money markets than to use funds obtained from retail deposits. This difference in funding costs arose from very complex financial structures to spread the risk of default more widely. By managing the risk of default in this manner the cost of finance for institutions could be reduced. Although UK lenders had the benefit of cheaper funding the availability of this funding could be affected by factors over which the UK market has little or no control.

When institutions saw increasing levels of default and potential default in the American sub-prime market they lost confidence in the financial structures that had been put in place to provide protection against the risk of losses. As a result these institutions stopped providing the lower cost funding which had been instrumental to the growth in the lending market and the wide availability of funding.

This had an almost immediate effect on the market. UK lenders had to review their policies to ensure that they would have funds available to meet their lending commitments. As money market purchasing became less readily available and more expensive they needed to reduce their reliance upon these funds. These changes also affected lenders’ opportunities to sell on or syndicate loans which they had already committed to provide.

As these factors affect the cost at which funds could be made available this has created and continues to cause concern about future economic performance and property values, which to a large extent had been supported over recent years by cheap borrowing cost. This in turn creates more uncertainty about the ability for borrowers to repay which makes lenders more cautious about the new loans they can provide.

Lenders are still adjusting to this new environment. At the moment this does mean that there are not so many sources of finance available. However, there are still plenty of lenders willing to provide funding on what they consider to be suitable terms; but for borrowers this might mean that the cost of finance will be higher and the amount offered will be a lower proportion of the value of assets. In short you can expect it to cost more to borrow less.

Posted: March 7th, 2008 under Property Finance.
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