How does Brexit affect demand for credit?

A report published by the Bank of England has shown that lenders expect a slowdown in demand for credit from both households in terms of unsecured loans and credit cards, and businesses, as a result of the ‘Brexit’ out vote. Lenders said that demand for mortgages was set to slow down, and this is now evident in more recent studies. Uncertainty about the outcome of Brexit negotiations in regard to the business sector has seen a fall in demand for credit, as it is likely that mergers and acquisitions will decrease during this period.

The survey confirmed that mortgage lending decreased slightly in the period just before the referendum, but unsecured loans borrowing increased in the three months to the end of June 2016.

However, there are some major concerns from the banks, who remain concerned about lending to large corporations, fearing Brexit could affect profitability.

Lending to the commercial real estate sector also decreased for the first time in four years in the second quarter, and in discussions conducted after the referendum, big banks said they expected “further tightening in lending”.  This comes as some giant property funds that own commercial property actually prevented investors from withdrawing approximately £15billion of their cash last week, as they rushed to get their money out due to fears of falling property prices

The survey also confirmed that demand for corporate lending decreased significantly for large companies in the three months to mid-June, perhaps because they were aware of the uncertainty of the impending Brexit vote. Demand for lending from small businesses increased, while demand for lending from medium-sized firms slightly decreased.

In separate figures published by the Council of Mortgage Lenders, it confirmed that for the first time in 20 years, first time buyer borrowing demand was higher than home movers.  The Bank of England survey also confirmed that demand for mortgage lending had increased significantly during the second quarter of 2016, especially for prime lending.

Paul Smee, director general of the Council of Mortgage Lenders, said: ‘Brexit, and its likely effect on the market, is a question to which the answer will not immediately be forthcoming. Lenders will continue to be open for business as usual, but lending volumes may be affected by uncertain consumer sentiment.’

The figures confirm that first time buyers took out 27,500 home loans in May, which is a 9% increase from April. Whereas, existing homeowners who were moving home took out 26,300 mortgages in May, marking a lower number than the first-time buyer figure, but still up by 18% on previous months.

The stamp duty change on April1st 2016, for buy-to-let investors, has also had a major impact on lending. Lending in May 2016 was almost half what is was in the run up to the tax changes. 4,400 loans were approved for buy-to-let house purchase in May, compared to 8,900 loans advanced for this purpose in May 2015.

Howard Archer at IHS Global Insight said: ‘Housing market activity returned to more normal levels after being buoyed in March by buy-to-let and second home sectors rushing to beat April’s Stamp Duty increase for these sectors.

He then stressed however that housing market activity and prices now looked to be at ‘very serious risk of an extended, marked downturn’ following the Brexit decision to leave the EU.

Managing director of Mortgages for Business, David Whitaker added further; ‘In March the industry processed three months’ worth of business because of the rush to beat the stamp duty surcharge. Now we have the leave vote to unsteady the waters, so we may have to wait until September’s figures are released in November before we can really begin to assess the impact of all the tax changes and Brexit on the buy to let mortgage sector.’