British building societies have cut their mortgage lending dramatically, so much so that repayments exceeded new lending by nearly £700million in June, new data from the Building Societies Association (BSA) reveals.

Although the figures were not completely unexpected, the extent of the drop came as a shock, as not even in the gloom of the last property recession in the 1990s did net lending became negative.

Adrian Coles, director general of the BSA, referred to the withdrawal of available capital as extreme conservatism and added that “They are keen to make sure they are only lending to those who are able to repay their mortgage.”

After the run on deposits at Northern Rock last year building societies have become extremely cautious, but they have also been subjected to gentle, but firm pressure from the Financial Services Authority to increase their reserves to more than 20 per cent of liabilities.

Consequently, in the current economic climate, lenders are keen to build up their own cash reserves instead of providing more mortgages to new customers.

Unlike banks, building societies do not have shareholders they can raise capital from in an emergency. Therefore, they need a different approach in the event of a sudden rush to withdraw deposits.

In 2007/2008, Nationwide, the UK’s largest building society, openly stated its intention to shrink its loan book, saying that a “prudent approach” had induced “a controlled reduction” in new lending to £ 6.7 billion the year before.

Gary Styles, chief economist at the property research company Hometrack, said this trend was bad news for homeowners because “it can only be that societies are losing market share to the banks.”

Building societies traditionally offer better standard variable rates on their mortgage deals, for example the standard variable rate offered by Nationwide at 6.75 per cent is 0.25 to 0.5 lower than the one offered by banks such as HBOS.

If the building societies’ market share of mortgage lending shrinks further, the lack of competition this causes might give banks enough freedom to raise their interest rates even further.

© Fair Investment Company Ltd