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Counting the cost

  • 17/06/2002
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Who is likely to offer borrowers best value over the long term ' banks or building societies?

The search for the source of best value in mortgage rates continues with the focus on the bottom line of standard variable rates (SVRs), rather than more attractive initial rates. The perennial debate over who offers best long-term value, the banks or building societies, rumbles again ‘ and for many the answer is building societies.

Moneyfacts, the mortgage and savings rate analyst, produces a table of best SVR rate providers twice a year. The latest table is due out in July and advisers will be looking closely for changes from last December, which showed the total interest paid on a £50,000 SVR mortgage between 1 January 2001 and 31 December 2001.

Mutual success

At that time, building societies held six of the top 10 positions in the survey of 35 lenders. These were Nationwide, Cheshire Building Society, West Bromwich, Coventry, Yorkshire and Principality Building Society. The lowest rate came from Egg, with Direct Line ranking eight on the list. Of the banks only HSBC and Standard Life featured in the top 10. Pro-mutuality campaigners will note, with some satisfaction, Abbey National sitting at the bottom of the table with fellow ex-building societies ‘ Halifax, Northern Rock, Woolwich, Alliance & Leicester and Cheltenham & Gloucester ‘ all in the bottom 16.

The total annual interest payment a borrower would have paid in 2001 with Egg would have been £2,978.64 com-pared with £3,020.90 at Nationwide Build-ing Society. However, a borrower would have paid over £500 more than this at Abbey National ‘ where the total payment for the year would have been £3,531.71.

To give some indication of the value over the long term, borrowing with Egg would have made the three-year total £9,300.56.

Coventry Building Society offers the next best three-year figure with £9,874.57 for borrow-ers entitled to a loyalty rate having been with the society for 61 months. Borrowers with Abbey National will have paid a £1,000 more on the SVR, paying £10,905.93.

You have to follow the roll call of building societies offering the lowest interest payments before you get to the next best offering from a bank, with Bank of Scotland coming in at number 20. Banks clearly do better the further north you go, as the next best bank is The Clydesdale at 28 and Yorkshire Bank at 29. NatWest Mortgage Services just about keeps the South’s end up in at 30, just ahead of Royal Bank of Scotland at 32.

Cheshire Building Society’s, West Bromwich and Coventry Building Society’s rate figures include loyalty rates applied after five years for the former two and after 61 months for the latter ‘ another feature peculiar to the mutuals.

‘Building societies can offer better value than banks because they do not have to provide the same kind of shareholder returns that banks have to,’ says Rachel Blackmore, press officer for the Building Societies Association. ‘Any money made is ploughed straight back into lower rates for mortgage customers and higher rates for savings customers.’

Further evidence comes from the Association of Chartered Certified Accountants (ACCA) which has recently warned against the dangers to interest rates with demutualisation. The ACCA has shown that SVRs offered by banks ‘ many of which used to be building societies ‘ are more expensive than building societies.

A survey the ACCA carried out in May this year, showed Abbey National charging 6.1%, Bradford & Bingley and NatWest 5.95% and Halifax 5.75% (the latter is based on interest calculated on an annual basis ‘ on a daily basis calculation the rate is 5%). The building societies, however, beat these rates with Nationwide offering a SVR of 4.74%, the Portman 5.65% and the Chelsea and Norwich & Peterborough 5.69% each.

Short-term gains

‘Supporters of conversion claim that demutualisation offers clear financial advantages to society members,’ says John Davies, head of business law at the ACCA, ‘but in the long term, this is not necessarily the case. Once a society becomes a bank, it has new financial demands to satisfy and in most cases this means more expensive mortgages. Members of societies should not be blinded by the short-term gains offered by a one-off cash windfall.’

It is this short-term gain that is the danger for borrowers also, being pulled in by a lender to an attractive rate, which has a finite benefit.

‘There is a trend at the moment to offer very low upfront rates on mortgages,’ says Blackmore. ‘But if you look at the long term, you would end up paying more with products from banks, because those products use low rates for the first six months to three years and then they rocket. If you look at consistency of building society rates over the long term, you end up paying a lot less than you would with a bank where you might get a lower initial rate upfront.’

Borrowers must look beyond what they will pay in the first few years, to what their lender will offer them further down the line. Unless a client is prepared to switch once their initial rate period is over, the SVR when they take out their mortgage is an important indicator of what can lie ahead.

‘The biggest difference is we operate on a margin of around 1%, most banks operate on 2%, Halifax may be just under 2% now,’ says David Holmes, communications manager at Yorkshire Building Society.

‘That is the biggest difference in how we pay our savers and charge our borrowers. Banks say they offer better deals, but in reality they offer loss leaders to get people in and then they take advantage of them on the SVR. Because most people will not remortgage they have got them. Our SVR is 5.45% and everyone pays that ‘ all our new mortgages are available for existing customers as well. There are not many lenders who can claim that. We do not need loss leaders to get people in and then stitch them up.’

Unfortunately, it is not enough to assume you will be offered the next best deal once your selected rate comes to an end. Even when the Nationwide cut away from the pack when it dispensed with low rate deals to offer a better long-term value on SVRs, its existing borrowers had to battle to get themselves onto the new SVR being offered to existing borrowers. Here again, it appears building societies can be more flexible than the banks in their approach to borrowers and their attitude to keeping borrowers on board.

‘We wait until someone comes to the end of their initial benefit period on their mortgage or tie-in period and at that time we will proactively contact them and offer them a range of products we have specially designed for existing borrowers,’ says Bob Gratton, product manager for Cheshire Building Society.

Better banks

As the Moneyfacts table on page 25 shows, some banks are offering good deals for borrowers.

‘Two years ago, we took a different stance on pricing as we felt discounts were not fair to the majority of our customers, who either didn’t have one in the first place, or for whom the discount has come to an end,’ says Rob Skinner, media relations manager at HSBC.

‘We wanted to move away from discounts and offer long-term value. Our variable rate customers all pay 4.75%, or if they want a discount, less than that ‘ that is why we stand out because we offer a SVR lower than many providers.

‘Discounts look good initially, but customers pay the price over a 20-year mortgage,’ Skinner adds. ‘It is always worth checking the variable rate, because what in one year is a very competitive mortgage rate, can the next year look very uncompetitive. People who were attracted by discounts may be suffering now.’

If the thought of lenders being proactive and thinking long-term is encouraging, there is some onus on borrowers to give some thought to their situation and what they want from their mortgage provider. If borrowers want everything on a plate they may have to take something they do not want to swallow. Your client needs to decide what they are comfortable with when it comes to borrowing ‘ now and in the future.

Ray Boulger, senior technical manager at Charcol, thinks these considerations are more important than all the debate about standard variable rates.

‘I think the question who is offering the best rate long term is irrelevant because nobody should be paying that,’ he says. ‘For those people who are inert and are likely to not want to switch lenders, then the variable rate is important. So one of the things you have to decide is, are you the sort of person who will be happy to switch at the end of the deal if necessary? But this may not be necessary because some lenders will let you have another deal anyway.

‘If you are the sort of person who does not want to remortgage, then you need to take account of other factors. But even if you are going to stay put most lenders will offer you something better than the SVR. While the SVR is the base point from which a lot of people start, if you have got a lender with a relatively high SVR who gives you a good discount, you may be better off with them, than with someone with a good SVR but a small discount.’

Tactical borrowing

It is perhaps the end of party-time where interest rates are concerned, if the predictions of rate rises are accurate and this calls for a different tack when it comes to borrowing. The point to consider, of course, is that there is little in the way of accuracy in predicting what will happen to rates and so a little tactical shuffling is in order to find the best value at this time.

‘Definitely go for discounts,’ says Boulger. ‘Whatever period you compare it over, discounts work out about 1% cheaper if you look at the best discount and best fixed rate across the board. Although everyone expects rates to go up, the difference is in how much. The city anticipates base rates to go up to 5.5% by the middle of next year. I do not think it will go that far, but if it does, it is already factored into the cost of fixed rates, so it is only if base rates are going to go over 5.5% that it is worth having a fixed rate to beat the base rate. And of course some people want the stability.’

In the same way that interest rates cannot be predicted, neither can the attitude of the lender. Clients may still be having to pick up their chattels and walk away once their initial deal is over.

‘When looking for long-term value, there are things to look at beyond the best SVR,’ Boulger points out. ‘Who treats customers best in giving them a good deal afterwards. It is not an exact science and the client has to take a view on the lender continuing that policy. At least if a borrower takes out a deal in the hope they will get another good deal with that lender, if the policy changes then at the end of the deal they can move on.’

‘For good long-term value, I would choose a lender who has a good deal initially and allows the borrower to take another new business rate at the end of the initial deal. Borrowers should not worry too much about SVR, except in as far as it impact on the value of discounts,’ he adds

Stephanie Spicer is a freelance journalist

sales points

Research from Moneyfacts has revealed that building societies typically offer better value to borrowers over the long term.

An analysis of long term value should only be relevant to those borrowers that do not want to regularly remortgage.

A selection of banks and building societies have introduced lower SVRs, in a bid to offer loyal borrowers long-term value.


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