Mutuals fight back on rates

Societies are fast realising that they must offer value for money to survive, writes Paul Durman fragments, we study the prospects for savers and borrowers and see if small societies can still compete

The mutualsare fighting back, giving customers millions of pounds of savings through cheaper mortgages, higher savings rates and other benefits.

Among the larger societies Nationwide, Bradford & Bingley and Britannia are the most strident champions of mutuality. Between them this year they will sacrifice pounds 285m of profits to give customers a better deal.

The simplest approach, and the one taken by the Nationwide, Bradford & Bingley and Yorkshire building societies, is to charge less for mortgage loans and to pay more interest on savings. Britannia has opted for a more complicated scheme that will pay customers an annual loyalty bonus whose size will depend on a number of factors, in particular the amount of their loan or savings and the length of time they have been a member.

The common aim is to encourage and reward customer loyalty and, more particularly, to relieve the pressure on building societies to convert into public companies or sell themselves to the highest bidder. Nationwide and other like-minded societies are now trying to demonstrate the value of mutuality in financial terms. Nationwide has cut its variable mortgage rate to 6.49 per cent, a full half of 1 per cent less than the rate charged by Halifax, the market leader that is surrendering its building society status to join the stock market. This is equivalent to an annual saving of pounds 227.50 on a pounds 50,000 mortgage.

Savings rates are an average of 0.4 per cent better than those available at Halifax. Together, these moves will shave pounds 200m off Nationwide's profits this year.

Alan Oliver, a Nationwide spokesman, says: "Rather than a one-off windfall, this is a benefit that will be there year after year. The message to savers is, they can get better rates from a committed building society."

Bradford & Bingley and several of the smaller societies have chosen to undercut Halifax by 0.25 per cent, and are charging 6.74 per cent on mortgage loans. This is worth about pounds 150 a year off the cost of a pounds 50,000 mortgage.

Bradford & Bingley has also committed itself to paying 0.25 per cent more than Halifax and Abbey National on savings. This package of benefits will cost it pounds 50m this year, a third of its annual profits.

Given its size, Yorkshire Building Society has made an even bigger commitment. It is giving up half its annual profits, or pounds 40m, to cut the margin between its investment rate and its variable mortgage rate from 1.9 to 1.25 per cent. The society's base rate currently stands at 6.59 per cent.

Yorkshire, which does 70 per cent of its business through mortgage brokers, says it has seen a big increase in applications for loans. Like other mutual societies, it argues that this is a virtuous circle: better rates leading to faster growth and higher profits, providing more money to give back to members by way of better rates.

Yorkshire maintains that Abbey National, NatWest and other shareholder- owned lenders will not compete on rates because they have to make dividend payments. David Holmes, a spokesman for Yorkshire, says: "There is an initial benefit of between a third and 1 per cent because we don't have to pay shareholders." He adds that building societies have traditionally operated on a margin (between mortgage and investment rates) of just over 1 per cent, against Halifax's margin of nearly 2.2 per cent.

Britannia's loyalty bonus can be seen as akin to the annual dividend that companies pay their shareholders, or the old Co-op divvy. Savers are awarded one point for every pounds 100 they have invested, up to a maximum of pounds 20,000, while borrowers receive one point for every pounds 1 of their monthly mortgage payment up to pounds 500. Each year, Britannia will make a bonus payment for each point held. Long-standing customers will receive more.

For all the scheme's intellectual elegance, Britannia's rivals say its complexities will make it costly to administer. Another big problem is that Britannia's borrowers and qualifying savers have to register if they are to receive their bonus payments, which are expected to average about pounds 40 this year. Britannia has spent pounds 4m advertising its bonus scheme and has sent registration packs out to 1.8 million members. Yet so far only about half of these have signed up for the scheme. Britannia is aiming to achieve 70 per cent coverage.

Other societies are offering alternative loyalty schemes. Coventry Building Society, for example, will cut its mortgage rate by three-quarters of 1 per cent for borrowers who have been with it for five years. That means a reduction to 6.24 per cent for 40,000 borrowers, equivalent to an annual saving of pounds 341 on a pounds 50,000 mortgage.

Mutual societies do seem to be working harder to give their customers a better deal; the only shame is that it took the threat of extinction to remind them who their owners are.