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

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power