Borrowing Outlook: 2023

The Current Economic Outlook, And What It Means For Borrowing

In 2023, a recession is widely predicted as central banks continue to hike base rates to bring spiralling inflation under control across the globe. While we have seen that most individuals and businesses are entering 2023 anticipating economic volatility, we are all waiting to see how difficult and prolonged a potential recession will be.

At country level, 2023 is likely to be the year governments play offence and defence simultaneously. Those that play too conservatively will hamper their ability to capture the inevitable opportunities for economic growth and accelerate out of a recession as the tides turn. On the other hand, over-optimistic thinking could result in a ‘capital crunch’ down the line, followed by a potentially prolonged period of low economic output, difficulty reducing unemployment figures, and a sluggish return to increased consumer spending - even as other countries figuratively get back on their feet.  

Some individuals and businesses will inevitably feel the squeeze this year. However, for those with liquidity, even economic contractions or headwinds can deliver the possibility to capture investment opportunities. We expect that Q1 - and possibly some of Q2 - will see many investors and businesses waiting to see how base rate increases affect inflation, as well as how the property market fares, unemployment figures, and changes to consumer spending and corporate earnings. We also expect they will analyse where the stress points emerge - at a global level, for corporates, across the mass-market and individually.

Individuals and companies with liquidity or the ability to borrow (especially contrarian investors and those who can move ahead of the market to seize opportunities) will be waiting for the right moment to benefit from any recovery, as well as potentially moving to snap up distressed or bargain investments or assets.

Mortgages, Remortgaging And Product Swaps - UK Mortgage Holders

While the relatively quick base rate hikes imposed by the Bank of England in 2022 were a surprise for some mortgage holders, they did set expectations of an interest rate rising environment. Moving into 2023, most UK mortgage holders and buyers have become accustomed to the fact that borrowing is simply more expensive than it once was.

At the tail end of Q4 last year, we saw a slight but undeniable rebalancing which led to a reduction in some mortgage rates, which lenders hiked significantly as they struggled to adapt to refinancing volumes and affordability analysis. As well as the Bank of England base rate increases, mortgage rates also reflected lenders’ cautious approach to calculating their margins in the wake of market volatility, particularly after Liz Truss' mini-budget.

We recommend that anyone needing to refinance in 2023 gets advice on products and options earlier than would have been necessary in a low interest rate environment: 8-9 months in advance of a term coming to an end is ideal for an initial discussion. However, currently, unless there is a time constraint on completing a refinance (i.e., the current mortgage term is coming to an end in six months or less), we may advise mortgage holders to sit tight after getting personalised advice on their situation. Depending on how the economic situation develops and borrowers' individual objectives and requirements, it may be a better play to take advantage of what looks like a gradual rebalancing of high-value mortgage costs. Personalised advice is essential here, as there is no one-size-fits-all solution and both benefits and risks must be considered carefully.

European And UK Mortgages For Non-Resident Nationals 

The tail end of 2022 saw the start of renewed American interest in the UK prime property market on the strength of the dollar, bolstered by the fact that UK mortgage rates generally remain more competitive than American counterparts. American demand for European prime property was also high in 2022 and will likely remain so this year.

Demand for European mortgages, especially in prime locations like the South of France and the Balearics, tend to be most in demand in the summer. The spring and summer months typically fuel transaction volume for European mortgages as potential buyers are inspired by summer breaks in the region or they imagine vacationing abroad in their own property. This year, UK and European buyers may find they are increasingly competing with investors from further afield as Americans and those with dollar wealth and/or earnings look to benefit from currency savings and European mortgage rates. Middle Eastern buyers may also re-enter the European property market in more significant numbers this year.

Equity Release And Bridging Loans

Bridging finance - while a relatively niche part of the market - is becoming more mainstream and is likely to be used more widely in 2023 as wealthy individuals look to access liquidity, seize opportunities and solve problems. 

Bridging finance is a secured loan collateralised against a property in the UK or abroad. Given wealthy individuals typically have a portfolio of high-value residential real estate, using these assets to access capital without selling a home is usually very beneficial. 

Bridging loans are typically used to complete property transactions quickly without using conventional financing products like a mortgage, but they can also be used to cover short-term gaps in liquidity, consolidate debt, pay off unexpected liabilities or raise capital to buy assets or make investments without using a bank loan - all of which can be useful in a recessionary environment. As a result, 2023 may see a higher volume of bridging loans. 

Depending on how the global economy fares, bridging lenders may also have an opportunity to offer finance in scenarios where other lenders can't or won't provide a loan due to increasingly restrictive lending criteria, strict underwriting or a guarded risk appetite, which can see retail lenders, in particular, take a highly cautious approach. If this is the case, some bridging lenders may look to capitalise on this, moving to capture new business and offer loans to borrowers who cannot access finance via traditional means.

Corporate Finance

Corporate finance remains readily available for small and mid-cap companies - even those looking to borrow a significant amount. However, we expect that corporate finance lenders may become more restrictive than they are currently if the UK experiences a recession, becoming more selective about the corporates they will lend to and the rates they will offer. 

Recessions, while they bring challenges for some sectors, invariably bring more trade and opportunity for growth for others. Many businesses that operate in those sectors will be looking for finance to capture potential growth, restructure, gain market share and potentially buy out struggling competitors. Lenders are ready for this and will provide finance, especially to businesses with a proven track record of thriving in recessionary periods. Utilities, telecoms, grocery businesses, tech, pharmaceutical and healthcare businesses and discount traders/retailers are likely to find that they can continue to access various corporate finance with relative ease, provided they have solid balance sheets to support lending and a good case for borrowing. However, other companies with good (and preferably recurring) revenue, a solid trading and credit history will still find they have plenty of options for corporate loans in 2023. 

Certain corporate finance products will come into their own this year as individuals and UK businesses look to manage and optimise cash flow as effectively as possible in light of a potential economic slowdown. As a result, we believe that corporation tax loans, VAT loans and income tax loans may be more widely used in 2023. All these financing products allow a business (or individual, in the case of income tax loans) to take out a loan to cover their VAT, income or corporate tax liability, facilitating cash flow and often, keeping much-needed liquidity available for other projects or bridging a short-term revenue gap.

Securities-backed Lending

While individuals from any country with significant wealth tied up in securities can access portfolio finance, at the end of 2022, we saw increased demand from wealthy US, UK and Middle Eastern nationals looking to borrow against their securities. We expect this trend to continue into 2023, especially as this type of finance offers borrowers access to significant capital quickly, and loans can be used for various purposes. In 2022, we saw borrowers use securities-backed loans to finance property purchases, create liquidity for additional investments, and to diversify their portfolios. Securities-backed lending can also solve more unusual challenges. In one case in 2022, a client used portfolio finance to create the liquidity they needed to place assets under management with a private bank to secure a high-value mortgage. We expect that using portfolio finance for similar scenarios, as well as to create liquidity quickly, may become more prevalent in 2023.

Portfolio finance can be secured against different types of securities, including venture capital funds, private equity, investment funds, mutual funds, hedge funds, liquid portfolios and stocks, pre-IPO stock, bonds and stock in private companies. All these options will remain available in 2023. However, lenders may restrict their lending criteria or offer lower LTV if there is a recession, and lower valuations as a result of a retracting economy will naturally dictate what a borrower can access in terms of loan amount. While borrowers almost always want to maximise LTV, in the case of securities-backed lending, lower LTV will reduce the risk of margin calls which is always to the borrower's benefit.

As we look forward into the rest of the year, there is still plenty of lender appetite for lending against securities, especially for quality borrowers with significant wealth tied up in various types of stock. Large finance packages remain available provided the value of the securities, the borrower's profile, plans and exit are all solid. At the end of 2022, we saw more enquiries from American borrowers with stock in high-value companies - including both listed and unlisted stock in the tech and medical sectors - again, a trend we expect to continue throughout 2023. We also believe we may see more significant growth in Asian markets than in European and US markets, which is likely to create more opportunities to access securities-backed loans for individuals across the region.

Private Debt

Private debt comes into its own in economic headwinds. At the moment, mainstream lenders remain very liquid with large capital reserves, and most are continuing to lend, particularly in high-value deals where there is a quality borrower backed by a significant asset base. However, restrictions may tighten over the year, and loans may become more challenging to access as mainstream lenders look to manage risk. 

Borrowers with more unusual or complex scenarios or those that need to solve short-term liquidity challenges may find that private debt is one of the best sources of liquidity this year. Private debt is quick to arrange, and these lenders generally have first-class underwriting capabilities but more flexible lending criteria than retail lenders. In some cases, private debt lenders will remain able to offer loans even when other institutions cannot. At the same time, private debt lenders will likely want to move to lend in parts of the market where other players may step back, restrict lending, or stop offering substantial loans. As a result, we expect an uptake in private debt finance this year, partially as a result of more borrowers with unusual lending scenarios look to access liquidity from less traditional sources of capital, or as savvy investors identify potential opportunities for aggressive return on investment that mainstream lenders can't or won't finance.

 

This article is for informational and illustrative purposes only and nothing contained within it should be construed as advice or a recommendation. The views and opinions expressed in this piece are those of the author and are not intended to indicate any market or industry viewpoints, or those of other industry professionals.

The financing options available to an individual will depend on their requirements and circumstances at the time they make a loan application. Any changes in a borrower's circumstances, any known likely changes, or omissions in the information provided can affect the suitability of the options available. These should be communicated to us as early as possible. Anyone considering securing debts against their main home, such as for debt consolidation purposes, should think carefully about this and consider all other options available to them. A property may be repossessed if the borrower does not keep up repayments on their mortgage or other debts secured on it.

Enness does not give advice on securities-backed lending, and lender introductions are unregulated. References to securities-backed lending is for information and illustrative purposes only and nothing contained within should be construed as advice or a recommendation and is not an invitation to buy or sell securities.  

Corporate financing and lender introductions are unregulated.