Loans Expert

The rate at which households and businesses defaulted on loans has been lower than expected in the first three months of this year, according to the Bank of England.

The Bank’s credit conditions survey for the first quarter of 2010 found that lenders reported that defaults on unsecured lending to households had fallen markedly over the past three months and by more than had been expected. Moreover, lenders expect that trend to continue over the coming three months.

But losses given default – the amount of loss a bank sustains each time a person defaults – had risen over the past three months and that trend, too, is expected to continue.

Overall secured credit to households – primarily mortgage lending – was broadly unchanged although credit availability for borrowers with higher loan-to-value ratios had risen somewhat. The inability of first time buyers to raise the 25 per cent deposit on a home that most lenders had been demanding has been widely viewed as a drag on the housing market. Lenders also reported that the default rate on secured lending had fallen, contrary to expectations as had losses given default.

But demand for secured lending to buy houses also fell unexpectedly, although many lenders attributed the drop to seasonal conditions such as adverse weather and the end of a favourable stamp duty regime for lower priced properties.

Lending to business also improved over the first quarter along with improvement in lenders’ own funding costs as well as a generally improving outlook for corporates. But the amount of credit made available to small business was little changed in the first quarter of 2010 and demand for credit from small and medium-sized businesses had increased by more than was expected.

Lenders commented that the demand for loans was driven largely by businesses seeking to refinance existing facilities and to a lesser extent, by increases in merger and acquisition activity and inventory finance. Demand for loans for capital expenditure remained subdued.

Lenders reported that non-price terms for small and medium-sized businesses had remained broadly unchanged although for large businesses, maximum credit lines had increased and loan covenants were likely to ease in the months ahead.

All the financial news read on Financial Watch.

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Tags: business loan, Loan Rates, Loans