A new research paper from the Bank of England finds that building societies charged lower mortgage rates than banks and specialist lenders, indicating ownership type can have an important effect on outcomes in the mortgage market.
'Does lender type matter for the pricing of loans?' reviews the evidence on differences between banks and specialist lenders, which are assumed to maximise profits, and building societies, which are assumed to conserve capital. The differing objectives between types of firm mean that one might expect differences in pricing behaviour, the pass-through of costs, and risk appetite.
From their study of the data, the authors find that building societies did set interest rates that are lower than the other lender types.
After controlling for other factors which might influence pricing, the researchers find the mortgage rate faced by an average borrower is around 19 basis points lower if they borrowed from a bank, and just over 51 basis points lower if they borrowed from a building society, compared to borrowing with a specialist lender.
But whereas, based on previous studies, the researchers expected building societies to smooth changes in funding costs and pass them through by less than banks, their analysis indicated societies actually passed on more of the changes in funding costs. The authors speculate that this may be because a building society balances the interests of its saving members with those of its borrowing members, so may pass on rate changes on both sides of its balance sheet, but they leave this for future study.
The research looks at the UK mortgage market in the period mid-2005 to mid-2007. This period was chosen because of the low level of arrears and the regulatory regime was relatively stable at that time. Clearly it would be helpful to have the analysis repeated for other, more recent periods.
The analysis uses loan-level mortgage Product Sales Data which lenders submitted to the regulator, as well as data on product fees from Moneyfacts.
All too often in studies in financial services it is assumed that maximising shareholder value is the only purpose for providers. This research is therefore welcome, as it recognises the important influence of different business models and ownership structures on objectives and outcomes in financial services markets.