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Building societies braced for tough year

Building societies are bracing themselves for another challenging year in the face of low interest rates and competition from Government-backed institutions, research showed.

The chief executives of mutuals expect interest rates to remain low during 2010, which they warned would continue to put pressure on their margins and restrict mortgage lending, according to the Building Societies Association.

They are also pessimistic about being able to increase the level of savings they attract, claiming the nationalised and part-nationalised banks and National Savings and Investments have an unfair advantage because of their implicit government guarantee.

Overall, chief executives expect retail savings balances to grow by only £28bn during the year, in line with 2009's rise, and well down on the gain of £58bn in 2008. They warned the depressed level of new savings would continue to limit the amount of new mortgage lending they could do.

Net mortgage lending, which strips out redemptions and repayments, is expected to edge ahead by only £14bn in 2010, barely more than last year's figure of £12bn and well down on the £108bn rise seen in 2007.

But despite the challenges, 58% of chief executives said they felt optimistic about the year ahead, and that they were less at the mercy of events that were beyond their control than they had been during the past two years.

Chief executives expect the recent gains in house prices to be maintained, but they predict prices will only rise by an average of 1% during 2010.

They also expect interest rates to remain low, with the base rate forecast to be an average of 0.83% at the end of 2010, rising to 2.2% by the end of 2011.

The research was based on responses from 33 out of 53 chief executives of building societies questioned during March.