Lending during the cost-of-living crisis

• Blog

The cost-of-living crisis has hit many hard, undoubtedly resulting in less money in the pockets of both consumers and businesses. Many have been affected by soaring energy costs, inflation, increased labour and materials costs, and much more besides. Lending during the cost-of-living crisis remains key to keep the country’s economy performing with lenders having to traverse a fast-changing landscape to ensure their interests are protected while still achieving their commercial objectives.

Lending during the cost-of-living crisis comes with increased risk without sufficient background checks, affordability assessments, understanding as well as legal protection.  With the squeeze on both personal and business finances set to continue, lenders are having to be more nuanced in their approach to borrowers and ensure they manage the risk of financial difficulties that could be faced by their customers through the lifecycle of their mortgage.

The difficulties which have impacted on lenders over the past twelve months have come from various sources, each changing the requirements and risks of lending during the cost-of-living crisis.

1. The property market – The slowdown in the property market has meant a slowdown in redemptions with the result of there simply being less money in the pot to lend. For some lenders, this means they are having to be more selective when deciding which loan applications to progress.
2. Valuations – valuations, upon which lenders heavily rely, have also been downgraded over the course of transactions, with the result the loan no longer becoming financially viable for the lender and offers being withdrawn and property chains collapsing.
3. Rising costs of raw materials, fuel and energy – For lenders involved in project/development finance, the increase in the cost of materials, fuel and energy and the consequential difficulty in sourcing affordable materials have had a significant impact on build costs. It goes without saying that this has affected the profitability of development projects, which in turn increases the risk to the lender. A key issue when lending during the cost-of-living crisis.
4. Labour shortages – In addition to the issue of rising costs, the risks to both lenders and developers are exacerbated by skills and labour shortages, which can cause unplanned and sometimes significant delays to development projects. For a lender, this can delay redemption of the loan which again reduces the level of funds available for a lender to commit to new loan applications.
5. Base rate – In March, the Bank of England increased its base rate to 4.25% and on 11 May this has again risen and now stands at 4.5%. This will continue to increase the cost of credit and so lenders have been forced to follow suit. This of course subsequently increases the cost of finance for borrowers. This has had significant impact to lending during the cost-of-living crisis and some borrowers have instead turned to family and friends as a potentially cheaper way of raising finance. It goes without saying that such loans come with their own risks and issues.

Notwithstanding the above, there are certainly still opportunities to be found and, despite what we read and listen to via the multitude of media outlets and sources, not all consumers and businesses have been impacted to the same degree. From residential mortgages to commercial loan facilities and project/development finance, lenders still want to continue lending during the cost-of-living crisis and borrowers still want to borrow. The lending market is continually adapting to address the challenges presented by the cost-of-living crisis.

As a lawyer who specialises in property finance work, I don’t have the difficult task of a lender in regard to carrying out affordability assessments, underwriting the risk, monitoring the health of a loan book and committing itself to lend. However, once the lender has made the decision to progress with a loan application and make an offer, they want to move swiftly and lend with the comfort of knowing their money is safely secured by a legal mortgage. This is where we can help, especially when lending during the cost-of-living crisis.

GA’s property finance team is made up of experienced property finance solicitors and we understand the risks and difficulties of lending during the cost-of-living crisis. We have streamlined systems in place to ensure the process of mortgaging the borrower’s property progresses as smoothly and diligently as possible.

If you would like further information on how we can assist, please contact me directly by emailing lucy.foster@GAsolicitors.com or calling 01752 203500.

You can also read an article I have written about lending to friends and family here.

Article by Lucy Foster, partner and head of GA’s property finance team.