Outlook: Building societies get cartel habit

ONCE UPON a time, there used to be something called the "building societies cartel". Every so often, the building society chiefs would sit down together and decide what their mortgage and savings rates were going to be. It was a simple and uncomplicated arrangement; everyone charged the same and everyone was happy. Then along came a new religion called competition which destroyed that cosy little world. No one would dare do that kind of thing these days, would they?

Old habits die hard, it would seem. Tomorrow, members of the Building Societies Association sit down to discuss proposals for a collective ban on mortgage redemption penalties. The effect of such a ban would be to end the sort of cash-back, discounted mortgage offers that have littered the press in recent years, as well as some good value fixed rate deals.

Why would building societies want to do this? Stealing borrowers from each other by offering deals of this sort to new borrowers or those willing to remortgage their homes has become a costly zero-sum game. It began five years ago when the housing market was still depressed and lenders were desperate for business and has since mushroomed. Virtually all new mortgages now carry some kind of penalty for early redemption.

Plainly if there were no such penalty, it would not be possible to offer deals like these, since borrowers would take their cash and discounts and then move onto the next lender. Alternatively, they would move to a more advantageous fixed rate the moment rates moved against them. The idea of these initiatives is to lock the borrower in.

Indeed the argument is not all black and white. It could be argued that lock-in mortgages are themselves a restrictive practice that disadvantages the borrower more than the lender. Certainly, many borrowers don't fully understand the back-end obligations they are entering into. But don't believe that building societies are proposing this solely for the benefit of their customers. Cartels never truly die; they just hibernate.

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