Personal finance: Building societies and the BSA aren't that cynical. Are they?

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The Independent Online
I HAVE always had a soft spot for the Building Societies Association (BSA), which represents mutually-owned lending institutions.

Building societies have in recent years stood up for the interests of ordinary people. They deliver lower-cost mortgages and higher rates on savings accounts than most banks, including those - like the Halifax, Woolwich and Alliance & Leicester - which used to be societies themselves.

Which is why I find the latest proposal by the BSA's director general, Adrian Coles, so barmy.

Mr Coles and the BSA have issued a consultative paper which proposes scrapping redemption penalties, the nasty little stings in the tail affecting those who want to switch their mortgages at the end of fixed and discounted mortgage periods.

The BSA argues, among other things, that redemption penalties prevent people from avoiding "interest rate shock", when you move suddenly from a low fixed rate to a much higher variable one. The difference can mean hundreds of pounds a month in mortgage payments.

By cutting redemption penalties, you make cut-price deals much harder to offer, therefore people won't suffer this shock so badly, seems to be the line.

Forgive me, but I don't buy the argument. Sure, there will almost always be a minority of people who suffer when their mortgages rise at the end of a fixed or discounted period.

But for the most part, the reasons why people have been attracted by such deals are utilitarian: they offer a way of controlling home loan costs for a time, usually at a lower rate than is currently payable. Alternatively, with cashbacks, they give borrowers a lump sum to do up the properties they have just bought.

In other words, they suit certain kinds of borrowers and perform a useful service for them. Sure, such deals are also open to abuse, usually when the penalties for switching loans midstream are hidden in the small print or are too onerous.

Then again, variable rate loans are not exactly wonderful either: those of us who had the misfortune of borrowing in the 80s will remember mortgage costs virtually doubling over a short period of time. Fixing would at least have prevented the despair many felt whenever the next building society letter announcing a rate rise dropped onto the mat.

What guarantee is there that if we all gave up fixed rates, discounts or cashbacks that lenders - building societies included - would treat us more fairly? Precious little, I suspect.

That is why I don't quite understand the reason for the BSA's move to reduce our choice in this way. Unless of course it owes more to the desire by building societies to win business from banks and retain it.

You see, the societies argue they are more competitive than banks and, for the most part, they are - at least when it comes to offering cheaper variable rate loans. Nationwide's is 0.6 per cent better than the Halifax.

Discounts and fixes have an unfortunate habit of obscuring this fact, particularly when lenders want to "buy business" by offering extra-soft deals. They then make the money back by locking us in for a few years. If I were a cynical building society chief, I might be tempted to argue in favour of scrapping redemption penalties just so that the competition is forced to compete on my own turf. And sod what customers actually want.

Of course, I must be wrong about all of this. Building societies and the BSA aren't that cynical. Are they?