by Stephen Dilworth
Do you remember a time when we all knew how the mortgage market worked? If you wanted a loan on a pleasant semi-detached house you went to a building society where you had probably been saving for a few years. If you were a businessman and wanted a loan on a factory or an office, together with a cheque book and credit card to settle your bills, then you went to a bank.
Life for the financial services industry was certainly a little easier then but, from the customer’s point of view, he had far less choice. In the last decade the dividing lines between building societies and the monetary sector have become increasingly blurred and the well-publicised flotation plans of one major society are indicative of a trend towards incorporation which may entirely remove the divisions.
The increased availability of funds and greater competition has certainly led to a better deal for the consumer in terms of keener interest rates, the introduction of added value to mortgage facilities and the development of new products. All these points, coupled with the Government’s successful privatisation of the municipal housing sector, have led to a tremendous increase in the owner-occupation rate, as can be seen from the following pie diagram:
Overall, housing has obviously proved to be a superb investment. In 1970 the average price of a house was £5,000, and by 1987 this had risen to £42,546. In Greater London, house prices increased by 135% between 1980 and 1987 and everyone will have their favourite tale about how they have won (or very occasionally lost) on the property merry-go-round.
Given all these factors property has generally been a good business to be in during the 1980s. The banks appreciated this in the early 1980s as they sought to improve their lending books with secure and profitable mortgages. As a result the monetary sector has increased its share of the mortgage market from 6% in 1982 to 19% in 1987, while building societies experienced a small decline from 82% to 72% over the same period. This banking activity has been supported by increased advertising resources and, with 25.1% of the financial advertising market, banks have a marginal lead over building societies in the amount of money they are using to promote such products.
However, do not write the societies off just yet! They still hold £154bn worth of retail funds plus £25bn in non-retail moneys. So there is plenty of money to play with. In addition, the expensive expansion of branch networks is now beginning to tail off for societies (see diagram) and so they are able to concentrate their resources in other more effective means of marketing.
Furthermore, the concentration of building society expansion within the last decade has allowed a more capital-intensive branch network to be developed with an increased use of modern technology. Perhaps a simple practical example of this is with building society cash dispensers, which in 1982 represented less than 1 in 1,000 of the ATM (automated telling machine) market, whereas today societes have 16.7% of the available machines in the UK.
This investment in technology will place societies in an excellent position to provide a cost-effective and speedy mortgage service.
One crucial area for building societies to regain a share of the mortgage market is through commercial loans. My own society will lend on a range of such properties from shops and offices through to surgeries and factories. What is more, the loans can go up to 90% of the valuation and on repayment terms of up to 30 years. This is a vast and lucrative market and societies have been driven towards it by a need to respond to competition — and also a strategic requirement to preserve profitability at a time when margins are being eroded for residential lending.
Surprisingly, demand for commercial mortgages does not seem to have suffered the dampening effect experienced by the residential market. This may be due to companies seeking additional capital. However, they will be wary of over-exposure, as with a UK trading deficit during the last three months of £4.78bn it is difficult to see how rates will decline in the immediate future: whichever way industry chooses to raise its funds, therefore, the current market will provide only an expensive solution.
Here is a simple list of the main types of commercial loans available from building societies:
(1) Offices — rates are normally 1% to 3% above a society’s basic rate with a few societies going up to 90% of the valuation. Most lenders do not publish any maximum limits for such loans and are willing to negotiate.
(2) Shops with or without accommodation — percentages tend to be a little more generous than offices and rates are similar, if not occasionally more competitive.
(3) Professional practices including surgeries — rates are normally 1% to 2% above the base rate and percentage loans among the larger societies can normally go up to 85%-90%.
(4) Investment property — if a property is to be let, either on a commercial or private basis, full details of the tenancies will be required as well as copies of any leases, rent details etc. Rates — about 1% to 3% above base rate with loans up to 90%.
(5) Factories and warehouses — a limited number of building societies are involved in this market, one of which is my own. Maximum loan available would be 85% with rates of about 2% above base.
(6) Licensed premises — with the recent Government policy to increase competition and remove the oligopoly among the major brewers, there is great potential in this market as smaller independent companies and/or individuals seek to purchase pubs. My society has dealt with a number of these applications during the past few years, but I envisage a strong increase in demand as a result of the Government proposals. Loans may be obtained at up to 85% at some 2% above base.
(7) Miscellaneous properties — in addition to the above, loans are available from several societies for hotels, garages, nursing homes, farms and building finance.
The entry of building societies into the commercial mortgage market is a key strategy in the policy of societies to provide a broader service, protect their mortgage base, and the profitability of their trading operations. In return, customers and professional intermediaries will expect a competitive rate as well as a fast and professional service. Societies are rapidly building up the expertise required to assess commercial loans although we still need to ensure that the market is fully aware of these facilities. The 1986 Building Societies Act has liberated some of our activities and has eased the financial and legal restrictions on commercial loans.
Societies are therefore both willing and able to fight back in the mortgage war, and this will result in an increasingly competitive market designed to meet the needs of a selective and better informed consumer.
