THE battle for a snare of the mortgage and savings markets looks set to intensify following the EBS building society decision to give members a share of profits. In a move which will reduce the society's profits by about £5 million this year, EBS is increasing interest paid on savings, and reducing the cost of mortgages for its members.
Interest paid on demand accounts held by EBS members - mostly, small savers - will be increased by half a percentage point from March 1st. The move will increase the interest earned on over 300,000 demand accounts containing between £400 million and £500 million.
An EBS member with £2,000 in a demand account will see his/her annual interest payment double from £10 to £20. EBS will increase interest paid on deposits of £1,000 to £3,000 from 0.5 per cent to 1 per cent. The new rate compares with rates available on the market of 0.25 per cent to 0.50 per cent.
For members with £3,000 to £5,000 in demand accounts, EBS will now pay interest of 1.25 per cent compared with current market rates ranging between 0.2 5 per cents and 0.50 per cent.
Mortgage holders are to pay less for loans with a reduction of 11p a month for every £1,000 borrowed because EBS is changing the way its annual interest bills are calculated. Some 45,000 mortgage holders will benefit - the monthly cost of every £1,000 borrowed at the standard variable rate will fall to £7.66 from £7.77. Monthly repayments on £50,000 mortgage, with an interest rate of 6.85 per cent, will fall by £5.50 - a saving to the borrower of £1,320 over 20 years, according to the EBS.
The society currently calculates interest once a year. From May 1st, EBS intends to start calculating interest on a monthly basis for new and existing mortgage holders.
Most of the banks already calculate interest on a daily or monthly basis, which means that customers get immediate credit for the amount of capital they have repaid. The effect of shortening the calculation period is to reduce the mortgage holder's monthly bill because interest is charged on a declining loan balance.
Up to now, EBS has calculated interest on mortgage loans at the beginning of the year and then divided this amount into 12 equal monthly payments. From May 1st, interest will only be charged on the amount owed each month so the customer will get credit for the capital he/she has repaid every month throughout the year.
EBS chief executive Mr Pat O'Reilly said the move would reduce the society's annual percentage rate (APR) by 0.2 per cent.
The moves by the building society are aimed at reinforcing its commitment to its mutual status "at a time when many of the top UK societies are converting to plcs or being taken over by banks". They are aimed at encouraging loyalty to the society in highly competitive markets where savers and borrowers are swayed not only by the price of the product but also by the potential for bonus payments or other potential gains, such as the shares given to Irish Permanent members when that society became a publicly quoted bank.
For EBS the moves will mean a reduction in income from borrowers and an increase in the cost of `savers' deposits. Estimating the cost of the package at £5 million, Mr O'Reilly said EBS "will have to operate on narrower margins". But he stressed that, as a mutual society owned by its members, EBS was not under the pressure of "the profits maximising ethos" of publicly quoted companies. "Our ethos is to maximise value for our customers. Our customers own the society," he said.
Assuming profit growth of around 10 per cent this year, the society, which reported profits of £23 million for 1995, could see the pre tax figure fall to around £20 million because of the changes. EBS has a strong capital adequacy ratio (16.4 per cent) and a strong reserve ratio (7.5 per cent), allowing the changes.
Its return on assets is expected to drop to about 0.7 per cent (from 0.86 per cent) in the current year and its funding/lending margin to about 2.5 per cent (from 2.99 per cent) because of the changes. These ratios would be comfortable, Mr O'Reilly said, "as long as we are running the society for members and making a reasonable return".
The latest move is not related to, recent changes in market interest rates. No decision has been made on a reduction in interest rates following moves by National Irish Bank and the TSB Bank.
