Secured Lending Products - UK

Secured loans, viewed by many as the poor cousin of unsecured loans and credit cards, have nevertheless made significant gains during the past few years. These gains, driven by rising housing equity, low interest rates and high levels of consumer spending, have, in turn, fuelled a burgeoning demand for debt consolidation products.

While market conditions improved during 2006, the acceleration of the US sub-prime crisis has created supply problems in global financial markets and this has affected both the availability and uptake of credit. Lenders have already begun to tighten lending criteria; the very structure of the market is being affected as lenders withdraw, and the number of small business failures (primarily among brokers) continues.

Indications are that secured loans are set to become more important as a product sector, with consumers continuing to seek viable solutions to their debt problems, and lenders introducing more flexible products that simultaneously meet regulatory requirements and provide a wider range of solutions.

This report examines the current state of play in the secured lending market, highlighting the impact of macro-economic and supply-side factors, as well as the changes in the consumer mindset that shape the market. Market size is assessed, and placed in the context of competitor products. Consumer research gives an insight into the mindset of the end user, and suggests new approaches that could take this oft-maligned product upmarket.

Issues in the Market

Key issues

Abbreviations

Market in Brief

Secured lending shakes off credit fears

Adspend on secured loans overtakes that of unsecured loans

The ‘Big Five’ banks dominate both secured and unsecured personal lending, accounting for some 47% of the market in 2007

…however borrowers are increasing their use of ‘other banks and building societies’ rather than existing mortgage providers

…and the number of secured loan providers is shrinking

The year of the Perfect Storm for brokers

Signs of new activity among lenders

APR is still the most important area of differentiation

Home ownership levels high, however housing market growth slows

...and while consumer appetite for credit declines

...debt management companies continue to thrive

Internal Market Environment

Key Points

Soaring property values boost market potential…

Figure 1: Average mix-adjusted UK house prices, 1997-2007

…but the good times could be coming to an end

High levels of consumer debt…

…but the number of bankruptcies and IVAs shows a slight decline

Figure 2: Number of individual bankruptcy orders and IVAs in England and Wales (seasonally adjusted), Q1 2004-Q3 2007

Lenders less receptive to IVAs…

…and insolvency practitioners have hit back

The need for debt management services soars…

Figure 3: Advertising expenditure for debt management services, H1 2003-H1 2007

…shifting from unsecured to secured lending

Banks respond to the credit crisis by tightening their lending criteria

PPI criticisms have affected consumer confidence…

…and driven change within the supply sector

Broader Market Environment

Key Points

The level of owner occupiers seems to have peaked at 70%

Mortgage approvals decline further

Figure 4: Number of mortgages and remortgages, 2002-07

A less certain housing market

UK homes are thought to be overvalued

BoE opts for an interest rate cut

Figure 5: BoE base rate, Sep 1990-Sep 2007

However consumers still face difficult a difficult 2008

Consumer Context

Key Points

Background

Consumer confidence at a low ebb

Figure 6: Rolling monthly, three-monthly and annual UK consumer confidence indices, Jan 2000-Sep 2007

Changing consumer intentions towards spending and saving

Figure 7: Intentions to save and spend in the next 12 months, 2002-07

Debt repayment also in decline

Figure 8: Debt repayment, borrowing and net debt repayment, Sept 2002-Sept 2007

The younger generation and low-income groups are less inclined to pay off existing debts

Figure 9: Debt repayment by age and socio-economic group, 2005-07

Competitive Context

Key Points

Credit cards continue to dominate the market…

Figure 10: Credit cards: number of cards in issue, total and average annual transaction volumes and value, 2000-06

…but overdrafts are also on the rise

Figure 11: Overdraft advances to individuals by residual maturity* (major british banking groups only), 2000-06

Growing secured lending sector - declining spend on credit cards and unsecured personal loans

Figure 12: Total gross secured and unsecured consumer lending, 2000-07

Figure 13: Total gross unsecured consumer lending split by product category, 2000-07

Unsecured loan market is ‘tightening up’ but penetration still high

Uptake of alternative debt management solutions also high

Sell and rent back

Strengths and Weaknesses in the Market

Figure 14: Secured lending products - strengths and weaknesses in the market, 2007

Strengths in the market

High levels of owner-occupancy and mortgage ownership

The end of fixed-rate mortgage deals…

…as homeowners struggle to hold on to their homes

Mortgage advances now heavily inclined towards debt consolidation

More ‘even-handed’ regulation

Weaknesses in the market

Increasing uncertainty within the housing market

Difficulties within the broader financial markets

Declining consumer appetite for debt

Reluctance on the part of many homeowners to place their homes at risk

Market Size and Forecast

Key Points

Almost 2 million UK adults have a secured homeowner loan or further advance

Figure 15: Credit ownership, October 2007

Market still growing

Figure 16: Size of the secured lending market, by sector and gross advances, 2003-07

Forecast - secured lending

Wait and see?

Figure 17: Forecast of the size of the secured lending market, by sector and gross advances, 2003-12

The consumer…

…and the market

Factors used in the forecast

Segment Performance

Key points

HEW and equity release become mainstream products

Figure 18: Housing equity withdrawal as a proportion of post-tax income (seasonally adjusted), Q1 2002-Q2 2007

…and demand is expected to increase

Market Share

Key Points

The Big Five banks still dominate the overall personal loans market…

…but less loyalty in the secured loan sector

Figure 19: Source of secured lending, October 2007

The biggest providers of further advances are the top mortgage lenders…

…but specialists have a major role to play

Companies and Products

Key Points

The number of secured loan providers is shrinking

Figure 20: Major british banking groups, subsidiaries, and joint venture partnerships offering secured personal loans and/or further advances, Jan 2008

Credit crunch repercussions continuing…

…and strategies are being reassessed

Signs of new activity?

APR is still the most important area of differentiation

Figure 21: Selected secured personal loan rates, as at January 2008

Brand Communication and Promotion

Key Points

Adspend on personal loans has declined…

Figure 22: Personal loan adspend, by category, 2003-07

…a trend which has accelerated since the start of the credit crunch

Intermediaries and brokers are casting a wider net

Figure 23: Personal loan adspend, by sector and media outlet, year to September 2007

Branding still has a significant effect on consumer choice

Financial firms’ websites failing consumers

Over half of the top 15 loan providers have reduced adspend since 2003

Figure 24: Secured personal loan adspend, by provider, 2003-07

…and all but two of the top ten intermediaries have reduced theirs

Figure 25: Intermediary adspend in the personal loans market, 2005-07

Channels to Market

Key Points

The direct route…

Mortgage lenders

Finance Companies/Specialist Lenders

…versus the indirect route

Brokers or originators

Aggregators - fast becoming a major force within the market

Internet is still more about research than transactions

Figure 26: Websites browsed for information purposes with a view to possibly buying and actually purchased from in the last three months (financial products only), Nov 2002-Jul 2007

New providers enter the market, as old providers expand their services

…but pressures on margins are an issue

The Consumer - Credit Ownership

Key Points

About Mintel’s consumer research

Figure 27: Credit ownership, October 2007

Unsecured lending dominates the overall credit market

Credit ownership is higher among men than women

Older consumers comfortable with unsecured debt...

…but less willing to take on debts secured on their home

Figure 28: Credit ownership, by socio-demographic groups, October 2007

Uptake of secured/homeowner loans is low across all age groups

Families and third-agers the biggest spenders

Figure 29: Credit ownership, by socio-demographic group, October 2007

Mortgage holders have higher overall levels of debt

Figure 30: Credit ownership, by socio-demographic group, October 2007

TV viewing belies adspend stats

Figure 31: Credit ownership, by Internet usage, newspaper readership and commercial TV viewing, October 2007

The Consumer - Motivation

Key Points

Car purchase key…

Figure 32: Reason for using secured credit products, October 2007

…but could this be a smokescreen?

Men the ‘kings of secured credit’

Figure 33: Reason for using secured credit products, by gender and age, October 2007

Families, pre-families and lower earners more in need of financial fixes

Figure 34: Reason for using secured credit products, by socio-economic group, lifestage and household income, October 2007

‘Other banks and building societies’ the most popular source of secured lending products

Figure 35: Source of secured lending, October 2007

Loyalty - or differing requirements?

Figure 36: Source of secured lending, by gender and age, October 2007

Low to medium earners are more likely to be tempted by offers from specialist lenders

Figure 37: Source of secured lending, by socio-economic group, lifestage and household income, October 2007