Private credit is benefiting from plummeting mortgage approvals
Falling house prices and rising interest rates have had a marked cooling effect on the number of new mortgage approvals but cash has to go somewhere, writes FundOnion's James Robson
In an era characterised by high interest rates, soaring inflation, and a global economy grappling with equity market downturns, the surge in investor interest in private credit markets is hardly surprising.
Much like its well-known other half private equity, private credit is generally understood to be non-bank financing provided typically to corporates or businesses.
This asset class is witnessing significant capital inflows, with firms like Blackstone, Goldman Sachs, and HSBC expressing bullish sentiments for this sector, extending into 2024 and beyond.
Any astute observer of the capital markets space might then notice a correlation with a reduction in net mortgage approvals and the surge in private credit investor appetite.
The Bank of England reported in September ’23, a total 43,300 net mortgage approvals for that month, which is the lowest since January this year. Furthermore, net approvals for remortgages have dipped to 20,600, marking their lowest point in 24 years (since 1999).
This isn’t entirely surprising, considering that rising interest rates have significantly increased mortgage costs across the board. In October 2021, a £200,000 house, with a 10 per cent deposit would cost you £812 a month (typical interest rate of 2.55 per cent).
Today, that same mortgage could cost you £1,160 (6 per cent interest), approaching a 50 per cent increase in monthly cost.
Against the backdrop of a cost-of-living crisis and persistently high house prices (with the average London tenant spending over 50 per cent of their salary on rent), it's understandable why there are fewer mortgage applicants and even fewer who successfully pass through underwriting.
COVID-19 has undeniably played a role, with Experian reporting widespread impacts on business credit scores due to the pandemic. Missed payments, higher HMRC arrears, reduced effective demand, and limited ability to conduct business has meant that businesses are still feeling the effects of these challenges.
You might rightly wonder how mortgage approvals relate to business loans and alternative finance. The main question is, how do the capital markets react when one of their mainstay lending channels gets squeezed by a reduction in demand?
Answer: they find someone else to lend it to.
Given that outstanding UK residential mortgage lending sits currently at around £1.6trn, even a fraction of a drop in mortgage approval levels can free up a significant pile of capital for other avenues.
And this isn’t money that’s just going to sit in a cash account – investors need to get it out to market and working for a return.
I’ve seen first-hand in the past 12 months a real and sustained interest by the capital markets community to continue investing in alternative finance, particularly, SME lending.
Just recently, iwoca secured a fresh £200m funding line from Barclays and Värde Partners – and other SME lenders have done the same this year including Nucleus Commercial Finance (£200m), LendingCrowd (£100m), Momenta Finance (formerly Merchant Money) (£115m), Fleximize (£136m), and TP24 (£240m), to name but a few.
Movements like this demonstrate that there’s a strong appetite from investors to provide liquidity in private credit and the SME lending space.
This signals that institutions perceive the SME sector as resilient during economic downturns, possibly anticipating strong recovery or growth in this market segment in the coming years.
Certainly, during any overall economic downturn, businesses that invest in themselves have the potential to thrive. Business owners shouldn’t wait for opportunities, they need to create them.
At the start of the year, some of the lowest rates that we were seeing at FundOnion were hovering at around 12 per cent. Now, however, the lowest rates we are seeing are close to 9 per cent, a significant drop in the cost of borrowing for SMEs, and an indication that lenders are receiving fresh supplies of capital that allow them to lend more quickly and that the market for lending is more competitive than before.
The combination of factors that have made these loans less expensive are also positive signs for businesses generally. With inflation trending towards historical norms and interest rates stabilising (or potentially decreasing), securing a business loan now could be an optimal strategy for catalysing growth.