Elect a Lender

Last week we had the County Council and European elections.  We used our collective voice to show our displeasure with MPs on two fronts.  For allowing the economy to get into such a mess and for MPs’ excessive expenses claims.  Out with the old and in with the new was the resounding result.  By the time this is published we may even be preparing for a new Prime Minister.

 

So, eventually MPs do pay for the mistakes they have made as the electorate is able to make a choice.  Is the same true in the banking world?

 

If we could vote for mortgage lenders and banks, which would you vote for?  I suppose the first choice is between banks and building societies. 

 

Banks operate to target profit for their shareholders, who aren’t necessarily their customers.  In that sense they have to strive for growth and outperformance against their competitors.  Profit is imperative in the Banking World as shareholders seek dividends.  As such, without adequate regulation, banks may grow without constraint.

 

Building Societies on the other hand work for the benefit of their members.  They distribute the proceeds of the business to their customers.  This is achieved by offering higher rates to savers or lower rates to borrowers.  Building Societies may use their “profit” to invest in the local community, or to expand the business thus creating jobs and economic prosperity region by region. 

 

Northern Rock were once a building society operating on the above principles.  However, as they demutualised, becoming a plc, the board were incentivised to increase profit to enable dividends to be paid to shareholders.  They targeted growth in the mortgage market, lending in a reckless manner in search of higher profits.  Halifax would also fit the above profile.  Both of these former building societies required rescuing.

 

Personally, I would vote for a building society.  Building societies are run with prudent and sustainable values.  A building society is not going to lend you 125% of a property’s value, nor will they lend to somebody who is unlikely to be able to repay.  Building societies will also not offer market leading savings rates only to reduce them two months later.  They tend to offer mortgages to those who can afford to save a deposit and are willing to share the risk of home ownership.  They offer savers rates which will be among the most competitive for most of the time.  This type of business model promotes long-term sustainability and encourages saving to buy a home.

 

I believe that the current financial crisis will give all of us a fresh perspective on credit.  There will be a mindset change from a “buy it now” culture to one where you will have to save to buy a home, a car, or for a holiday.  This will promote community spirit as we will discuss our finances more than we have been doing recently.  It won’t take long to change either.  A simple conversation about having to save for your deposit, quite quickly becomes accepted as the normal way to buy a home among those potential buyers.  Borrowers will not expect 100% mortgages and if home ownership is important they will make plans to save and be financially disciplined.  This can only be good for our state of mind and for a more sustainable wider economy.

 

If home ownership is on your mind then contact an Independent Financial Adviser to discuss your mortgage and also savings options.  The IFA will recommend the best route for you to attain your new home.

 

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Adam Elkin CertPFS

6th June 2009