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Building societies head into ‘non-traditional’ mortgage lending

Posted 22 March 2017 by Keith Osborne

New rules mean that building societies can start to look away from their traditional products to new ways of lending money to the nation's homebuyers...

Changes to Prudential Regulation Authority rules are encouraging building societies to move into non-traditional areas of lending which could have a significant impact on the mortgage market. That’s the conclusion of industry experts who believe that the mutual sector is on the brink of a significant change.

In recent months, a number of building societies have announced plans to move into ‘non-traditional’ areas of lending such as bridging loans, large mortgages and ‘interest-only’ lending.

Building Societies Association head of mortgage policy Paul Broadhead says: “I’ve had discussions over the last couple of years with a few building societies, who think there is an opportunity for interest-only as the Mortgage Market Review settles down and lenders work out where demand is.

“We’ve also seen some of the smaller ones look at lifetime mortgages, and I suspect we’ll see more of that.”

The change in focus is partly being driven by a relaxation of Prudential Regulation Authority rules. These changes free mutuals to look into different areas of business and are encouraging building societies to diversify.

Dudley Building Society chief executive Jeremy Wood says: “Now is the opportunity for them [building societies] to start having a look at their corporate plans for the next five years about what they’ll do, because if they don’t review their business model it becomes redundant pretty quickly.”

Broadhead says: “Building societies are innovative and shouldn’t be seen as museum pieces. Sometimes the consumer, and the industry, perception of building societies is unfairly sepia tinted. Building societies can’t sit still.”

Building societies being ‘driven’ to higher-risk areas

A leading mortgage expert believes that Bank of England rules about lenders’ capital requirements is also forcing mutuals to look into alternative areas. Ray Boulger says: “The reason these building societies are prepared to look at some of these higher-risk areas is because they have been driven there by the regulator.

“Although the Bank of England has said it will amend the capital adequacy requirements for smaller lenders, the reason most building societies, and all the smaller ones, can’t compete in the low loan-to-value market is the capital they have to hold against low-risk loans is significantly higher than the capital that has to be held by the larger lenders, and they simply can’t compete.”

Moving into new areas is a risk, and Boulger urges lenders to make sure they have the expertise before offering non-traditional loans. “For any lender, the key thing is to make sure that, if you’re going into a new area, you understand it and you have underwriters that understand it,” he says.

“Clearly the smaller you are as a lender, the more risk there is if you go into new areas and get it wrong. It will have a disproportionate effect on your balance sheet.”


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