Page 1: Introduction
Britannia is the third largest UK building society, with group assets exceeding £16 billion. Following the conversion to plc status of a number of building societies, Britannia has emerged as one of the leading advocates of retaining its mutual status. In support of this stance, Britannia announced a unique Members’ Loyalty Bonus Scheme in February 1996. In early 1997, therefore, a million members shared £35 million of the profits through an annual cash payout. Britannia can truly be called ‘The Sharing Society.’
The business mission of Britannia is:
‘To improve the financial health of our members and customers by satisfying their evolving borrowing, investment and housing needs.’
This case study outlines key aspects of how this mission operates in practice. The purpose of Britannia, like other building societies, is to raise funds from households looking for safe and prosperous savings opportunities, and lend these funds to borrowers to help them buy their homes with a mortgage of 20 to 30 years.
The mortgage market is one of the most important sources of investment to the UK economy. Every year thousands of new borrowers take out mortgages with building societies and other financial institutions. This enables them to purchase, over a period of time, the most important asset they will ever own - a home. Some borrowers will be first time buyers. Others will be onto their second or third homes, or even their final retirement homes.
In essence, a building society provides a simple means for households to save for the future or deposit any spare funds (savings) and for borrowers to arrange to raise the necessary finance to purchase a house through a long term mortgage (usually for 20-25 years). Britannia safeguards the savings of its depositors, while paying them interest and lends out these savings to customers wishing to take out a mortgage to buy a property. The customer taking out the mortgage pays interest to the Britannia.
The Britannia therefore acts as custodian to vast sums of money which have been entrusted to it by savers. It must also ensure that its lending decisions are based on sound financial judgements. Britannia needs to make many decisions in the nature of ‘Should we lend £52,000 to Mr and Mrs Stevens.’ As a responsible lender, Britannia is interested in their ability to take on such a financial commitment and the risk associated with it. For example, do Mr and Mrs Stevens have steady incomes? Are they likely to be employed for a number of years? Is the property that they hope to buy worth the price they are paying for it?
What has to be known about an individual prior to granting a loan?
Whenever the Britannia receives an application for a mortgage advance, it must make sure that the applicant will be likely to fulfil the promise contained in the final mortgage deed:
‘to repay the mortgage by the proper instalments.’ For the Britannia, this means working out whether the customer can afford the repayments, and whether they are likely to do so. It would be wrong to lend to a customer if they might not be able to repay the loan.
When an individual takes out a mortgage, the usual procedure is to put down a deposit of 5% of the value of the house. The Building Society then advances the remainder of the sum required to purchase the property. The borrower repays the Building Society in instalments (plus interest) over a period of time. Britannia usually lend up to 95% of the purchase price or the valuation (by an independent valuer), whichever is the lower.
The usual way of calculating how much Britannia will lend is to look at the income of the borrower. Britannia will lend up to 3 x the higher income plus 1 x the lower income, or they can borrow 2.5 x the joint income, whichever is greater. For example, Jane Stevens earns £13,000 a year as a school secretary. Her husband, Philip, earns £8,000 a year as a cleaner for a large company.