Mortgage lenders change with times

THERE was a time, about 20 years ago, when building societies used to lend money exclusively for people to buy homes and banks used to lend money for production, consumption, investment - in effect, everything else. The two did not really compete. Banks tended to advance mortgages only to their own staff, and the main competition for building societies came from local councils.

Mortgages were long-term loans, committed for 25 or 30 years, while bank credit was short term. Even the rates of interest were different. Bank base rates followed the lead given by the London money markets and the Bank of England, while the building societies offered a standard rate for deposits from small investors, who provided the overwhelming bulk of their funds. The societies all charged identical rates for their mortgages as decided by the industry's trade body, the Building Societies' Association.

The BSA controlled the supply of mortgages by raising or lowering its rates to savers, which in turn determined the availability of money. When savings rates were attractive, savings flowed in to the building societies' extensive network of branches, and mortgages were plentiful but rather dear. When savings rates were low, the inflow of savings fell back and mortgages were relatively cheap but, in effect, rationed. Borrowers could wait for months to get a loan.

But these cosy cartels were shaken up. First, the bigger societies started to offer premium rates of interest for long-term money outside the control of the BSA and to lend it out again to borrowers willing to pay a premium for larger loans. Then the incoming Conservative Government took a hand by allowing banks to enter the mortgage market and pressing the BSA to reduce and then abolish its powers to dictate rates for savings and mortgage.

In return, the building societies were allowed to make personal loans and further advances for a variety of purposes in competition with the banks - and to raise an increasing amount of the money they needed to finance their business in the London money markets, where interest rates were often significantly cheaper. At first, the banks concentrated on the top end of the market, making larger loans at higher rates of interes. But they quickly moved down-market to compete directly with building societies.

By 1985, local councils had been virtually squeezed out of the mortgage market, but the big London and Scottish clearing banks were competing vigorously for market share. Other banks such as Bank of Ireland, Citibank and Banque National de Paris also entered the market enthusiastically.

At the same time, a new group of specialised mortgage companies were being set up, including the National Home Loans Corporation and the Household Mortgage Corporation. They raised their money exclusively in the London money markets and lent through mortgage brokers, independent financial advisers, estate agents or insurance companies.

The last two saw mortgage packages as a perfect way to sell homes and endowment policies - which suddenly became the popular alternative to plain repayment mortgages in helping borrowers repay their mortgages.

In 1985, building societies accounted for three-quarters of the £150bn market in mortgages outstanding and 80 per cent of the net lending done that year. The banks had about 15 per cent of the balances outstanding and about 20 per cent of the new business. Since then, the balance has fluctuated as the banks have soft-pedalled on mortgage loans when there was plenty of demand in the rest of the economy and returned to them during the recession.

In 1993, the banks took over 50 per cent of the market in new mortgages for the first time, but last year the building societies took advantage of their increasing commercial freedom and commercial skills to regain market share. Many of the non-clearing banks found the business increasingly competitive, and both Bank of America and BNP have sold their mortgage portfolios.

Competition has also forced an increasing number of building societies to seek mergers and takeovers to minimise their operating costs and stay competitive. The number of building societies has fallen steadily over the last few years from 300 in 1979 to just 80, and the process is far from finished. The remaining smaller societies have been increasingly driven to team up with insurance companies or mortgage brokers to market their loans in combination with insurance policies, pension plans, PEPs and unit trusts.

The growing popularity of telephone marketing has given banks and building societies a new opportunity to do business through subsidiaries such asMortgages Direct, First Direct, Alliance & Leicester Direct, Nationwide Direct and Bradford & Bingley Direct.

The big losers in the last few years have been the central mortgage lenders. The Government's increased determination to control inflation by driving up real interest rates made the money market rates on which they depended dearer not cheaper than the retail deposits that the banks and building societies could attract through their branch networks.

In the boom years of 1987 and 1988, the central lenders took about 15 per cent of the market for new loans but have seen their repayments exceed the new loans they have been able to make in the last three years. Their share of the balance outstanding has fallen from a peak of 7 per cent in 1987 to barely 1 per cent.

Line-up of the big lenders

Largest 20 mortgage Residential mortgage

lenders, 1993 loans outstanding

(£ billion)

1 Halifax 54.2

2 Abbey National 43.7

3 Nationwide BS 26.7

4 Woolwich BS 19.7

5 Leeds Permanent BS 15.3

6 Cheltenham & Gloucester BS 14.0

7 Alliance & Leicester BS 13.5

8 National Westminster Bank 12.7

9 Barclays Bank 12.4

10 Bradford & Bingley BS 10.5

11 National & Provincial BS 10.2

12 TSB Bank 8.3

13 Britannia BS 7.6

14 Lloyds Bank 6.8

15 Midland Bank & First Direct 6.5

16 Northern Rock BS 5.8

17 Bristol & West BS 5.7

18 Bank of Scotland 5.4

19 Royal Bank of Scotland 4.6

20 Yorkshire BS 4.2

Source: Council of Mortgage Lenders

Yaya Sanogo celebrates scoring the opening goal with Arsenal's English midfielder Alex Oxlade-Chamberlain
champions leagueLive: All the latest from the Emirates and Bulgaria, where Liverpool face Ludogorets
Andy Murray with his girlfriend of nine years, Kim Sears who he has got engaged to
peopleWimbledon champion announces engagement to girlfriend Kim Sears
CBC personality Jian Ghomeshi has been charged with sexual assault
ebooksNow available in paperback
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Langley James : IT Support; Helpdesk, VMware; Manchester, £18k

£16000 - £18000 per annum: Langley James : IT Support; Helpdesk, VMware; Manch...

h2 Recruit Ltd: Business Development Manager - HRO - £70k+ ote

£35000 - £450000 per annum + £3k car, £70k ote: h2 Recruit Ltd: Do you want to...

Citifocus Ltd: Newly Qualified Accountants - Risk Mgmt

£Attractive Package: Citifocus Ltd: Prestigious financial institution seeks to...

Citifocus Ltd: Operational Risk Analyst

£Negotiable: Citifocus Ltd: Experienced operational risk professional with ban...

Day In a Page

Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?
Nightclubbing with Richard Young: The story behind his latest book of celebrity photographs

24-Hour party person

Photographer Richard Young has been snapping celebrities at play for 40 years. As his latest book is released, he reveals that it wasn’t all fun and games
Michelle Obama's school dinners: America’s children have a message for the First Lady

A taste for rebellion

US children have started an online protest against Michelle Obama’s drive for healthy school meals by posting photos of their lunches
Colouring books for adults: How the French are going crazy for Crayolas

Colouring books for adults

How the French are going crazy for Crayolas
Jack Thorne's play 'Hope': What would you do as a local politician faced with an impossible choice of cuts?

What would you do as a local politician faced with an impossible choice of cuts?

Playwright Jack Thorne's latest work 'Hope' poses the question to audiences
Ed Harcourt on Romeo Beckham and life as a court composer at Burberry

Call me Ed Mozart

Paloma Faith, Lana del Ray... Romeo Beckham. Ed Harcourt has proved that he can write for them all. But it took a personal crisis to turn him from indie star to writer-for-hire
10 best stocking fillers for foodies

Festive treats: 10 best stocking fillers for foodies

From boozy milk to wasabi, give the food-lover in your life some extra-special, unusual treats to wake up to on Christmas morning
Phil Hughes head injury: He had one weakness – it has come back to haunt him

Phil Hughes had one weakness – it has come back to haunt him

Prolific opener had world at his feet until Harmison and Flintoff bounced him
'I have an age of attraction that starts as low as four': How do you deal with a paedophile who has never committed a crime?

'I am a paedophile'

Is our approach to sex offenders helping to create more victims?
How bad do you have to be to lose a Home Office contract?

How bad do you have to be to lose a Home Office contract?

Serco given Yarl’s Wood immigration contract despite ‘vast failings’
Green Party on the march in Bristol: From a lost deposit to victory

From a lost deposit to victory

Green Party on the march in Bristol
Putting the grot right into Santa's grotto

Winter blunderlands

Putting the grot into grotto
'It just came to us, why not do it naked?' London's first nude free runner captured in breathtaking images across capital

'It just came to us, why not do it naked?'

London's first nude free runner captured in breathtaking images across capital