Recently I managed to arrange a mortgage with a Building Society that I was unable to place with any other lender including the High Street Banks. The reason for the bank’s reluctance to lend was due to a blemish on our client’s credit record whilst he was living abroad. He genuinely had a mix up with his direct debits whilst away, and when he returned he brought all his accounts up to date. Unfortunately, some of the accounts had been defaulted and this made his credit score plummet, and he was left struggling to obtain a mortgage. Thankfully the Building Society listened and realised the client represented no higher risk than any of its other customers and lent the money.
However, there are storm clouds gathering around the Building Societies as they had to take 7.4 billion out of the mortgage market last year as they hit a funding crisis. The reasons for this happening include savers withdrawing 7.6 billion out in 2009 because of low interest rates, and local authorities withdrawing 6 billion. This led to them lending just 5 billion last year as opposed to the 111 billion high in 2006. Strangely enough even with the problem the banks experienced, 2009 was the year they increased market shares in the mortgage market with the Building Societies only lending 13% of gross mortgage lending.
I believe that the mutuals have suffered unfairly at the hands of the nationalised and part nationalised banks, as they are not being propped up by the taxpayer. Also, to rub salt into their wounds the financial services compensation scheme that protects people who have up to £50,000 with a bank or Building Society in savings, is funded disproportionably by the Building Societies. The reason for this is because the amount the Building Societies pay is based on the amount of savings they hold as opposed to the risk they represented. They have paid out for the complete failure of Northern Rock, Bradford and Bingley and the Icelandic banks and others and have hardly caused a ripple themselves. For example, Nationwide have had to pay almost 300 million to the scheme in the last 3 years.
I believe that we need to keep a strong and vibrant mutual sector in the UK to keep the banks on their toes and to ensure that they are not too big to fail. To this end I think the mutual movement should be getting bigger not smaller and the government needs to take measures to readdress the balance. For example, they could guarantee all deposits in the Building Societies like they did at Northern Rock, and perhaps, they could allow Building Societies to pay savings gross for a limited time to allow them to recover. The second measure I don’t believe would cost too much in the scheme of things with interest rates being so low. I consider that Building Societies have historically done just what their name implies in that they build societies. They have done this over the centuries by being prudent and having mutually beneficial relationships with their members. Unfortunately these attributes could not be attached to the banks, so it is vitally important they remain competitive.
If you wish to discuss this further or for any other advice, Kieron Bassett Financial Services have two Independent Financial Advisors. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.
Kieron Bassett CertPFS
22 February 2010
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