Banks losing to Building Societies for Mortgage flexibility

Building societies are stealing ground on the high street banks by increasing their mortgage lending and offering more competitive rates in both the home loan and savings markets.

The Telegraph suggests that 60% of “best buy” mortgages are now offered by building societies, and it is these mutual organisations that are providing affordable mortgages for first-time buyers and those who don’t have 25% equity in their homes.

The Banks are more competitive in the savings market, but building societies more than hold their own.  More than 40% of the best-buy savings accounts in the past year have been from building societies, according to MoneyFacts.

In the aftermath of the credit crunch and the subsequent financial crisis, these smaller providers appear to be providing effective competition to a somewhat fading Banking sector. This led Vince Cable, the Buisness Secretary, to comment last week that the decision to allow a raft of building societies to demutualise in the 1990’s was “one of the greatest acts of economic vandalism of our times”.

Mr Cable has long been a supporter of the mutual sector, saying the fact that building societies were owned by their members, rather than shareholders, meant that they could deliver better long-term value to customers than Banks could offer.

Martin Shaw of the Association of Financial Mutuals – which also represent mutual insurers, friendly societies and provident health insurers – said there were two main benefits to being a mutual. “These organisations don’t have to pay dividends to shareholders, so profits can be used to benefit members in terms of more competitive rates, investing in better customer service or delivering higher investment returns.” But he said the critical difference was that mutuals could take a more conservative approach to growing the businesses, rather than “growth at any cost”.

“Mutuals will still want to make a profit, but don’t have to make a profit at all costs. Many may take a longer-term view, or accept a lower rate of return. In contrast, a listed company is likely to have a more ambitious business plan as its investors are looking for a return on their money. In a good economic environment they may be able to deliver these returns, but it can lead to companies taking on too many risks.”

When the economy falters, profits and share values can fall – as we have clearly seen in recent years with the banks.

But not everyone agrees with his more simplistic evaluation that a mutual structure always leads to better outcomes for customers.

Ray Boulger, Senior Technical Manager with John Charcol, said: “There are good building societies and ones that are performing poorly, just as there are good and bad banks.”

He said it was those banks that were previously building societies that suffered the most when the credit crisis hit: Northern Rock, Halifax, Alliance & Leicester and Bradford & Bingley all had to be rescued by the taxpayer or sold at knock-down prices to a stronger and more stable rival. Other demutualised building societies, such as Woolwich, Abbey and Birmingham Midshires, were taken over by bigger banks – Barclays, Santander and HBOS respectively – which perhaps explains Mr Cable’s damning verdict.

But as Mr Boulger pointed out, many building societies have also struggled to weather the current economic storms. Dunfermline, Derbyshire and Cheshire have all been rescued by Nationwide, the largest player in the Building Society  sector. Similarly, Yorkshire and Chelsea building societies merged, and then subsequently took over the troubled Norwich & Peterborough, while Britannia, which was the second-biggest player in the sector, merged with the Co-operative Bank – which, while not a building society, is still a mutual organisation.

He said: “The building society sector has probably shrunk by about 30pc. While the stronger players in this sector are now doing well – particularly in the mortgage market – there are some banks, notably Barclays, HSBC and smaller players such as ING Direct, that have also offered market-leading rates and increased their lending.”

Part of the success of the building society sector has been due to the relative performance of its biggest player, Nationwide, which increased its mortgage lending by 44% last year. Other larger, stronger players have been gaining ground in the past couple of years: Coventry has boosted mortgage lending, while Yorkshire bolstered its savings by purchasing Egg’s savings book, enabling it to offer competitive mortgage deals.

Many building societies, like banks, have had trouble raising money on wholesale markets, so have had to offer more competitive savings rates to attract retail funding. This has led some smaller building societies – which may previously have relied more on their local branch-based catchment – to offer leading online deals, which have proved to be a competitive force in the savings market.

According to Moneyfacts, smaller building societies such as Hinckley & Rugby, Melton Mowbray, Market Harborough, Nottingham, Cheshire, Leek United and Teachers have all appeared in the best-buy tables over the past year.

However, Mr Boulger said comparing banks against building societies could be a false dichotomy. He said it was the size of the institution, rather than its structure, that was key. “Thanks to its size, Nationwide in many ways operates like a bank,” he said. It may run a number of consumer-focused campaigns, for lower fees on overseas debit card transactions, for example, but its directors still collected banker-style payouts last week. In contrast, some of the smaller banks, such as Aldermore and ING Direct, can behave more like traditional building societies.

One benefit is that the smaller size of many of these institutions enables them to look at lending requests on a more individual, consultative basis, rather than taking the blanket approach of refusing anyone who does not hit a pre-defined list of criteria. Mortgage brokers report that customers who have been turned down by banks can be accepted by building societies, which take a more in-depth look at whether they can afford the deal. It is perhaps no coincidence that building societies, which typically are smaller, remain dominant in the market both for first-time buyers and for those who can only afford a deposit of between 5pc and 25pc.

But those who want to get the best deal on their money shouldn’t limit their choice to just one part of market. The sheer range of savings and mortgage products means that both building societies and banks target their best buys in very niche areas. For example, the providers offering the best two-year fixed-term savings rates are unlikely to offer a market-leading one-year or five-year fix, let alone the best-priced online instant-access account. Similarly, if you are looking for a five-year fixed-rate mortgage, the lenders with the best rate for a 35% deposit may be different from the ones offering the most competitive deal to those who can put down 25% of the property value.

Kevin Mountford of Moneysupermarket.com said: “If you want the best rate on your savings and mortgage, you need to shop around. Loyalty to any one institution, whether it’s a bank or building society, rarely pays.” But Sylvia Waycot of Moneyfacts said there was some evidence to suggest that those who weren’t switching account every six months got better value for money with a building society.