Higher interest rates here to stay, Scottish Building Society declares

The sharp rise in the cost of borrowing, following a long period of rock-bottom rates in the decade or so after the financial crisis, has intensified the pressure on consumers struggling with the cost-of-living crisis.

Monetary Policy Committee members voted to increase the base rate to 3.5 per cent in December – it stood at 0.1% just 12 months before – and a leading figure on the Scottish financial scene has declared the new levels are here to stay.

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“For 12 years of thereabouts, we have lived in a period of exceptionally low interest rates… and I think the one thing that struck me is that everybody viewed the exceptionally low interest rates as almost a normal,” said Paul Denton, chief executive of the Scottish Building Society, one of Scotland’s oldest mutuals that celebrates its 175th birthday in 2023.

“Both savers and borrowers saw that as a normal period. But for a variety of reasons, both global and domestic, we have seen eight base rate rises (in 2022) which is extraordinary. For me, 2022 was the year we returned to normal.”

Mr Denton emphasised: “This is not a Covid exit. This is not a blip that will go in six months. This is us returning to a normal level of interest rates and consumer behaviour needs to adjust to a new normal, rather than hoping that this is a blip. That for me is an education piece with colleagues, with customers and with partners. We do a lot of work with mortgage brokers, many of whom have come into the industry since 2008 and do not know anything else.”

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With this new normal, Mr Denton said there will be an end to the expectation that house prices will always rise, amid forecasts that values will fall this year. Mortgage holders will also face higher monthly bills.

Mr Denton, who has worked in financial services for 30 years, said the effects of these seismic changes are not yet visible in the Society’s books, but he declared: “It is like a storm gathering on the horizon. It has not hit land yet.

“We have not seen a significant uplift by any means with regard to customers calling in experiencing financial difficulty around their mortgage payment. But we do know it will become more difficult over the course of the next few years as many customers will roll off low mortgage rates and on to the new norm as I have described.

“Typically, the shock that will people will see for an average mortgage will be anything between £250 and £300 a month. And that is not a short-term blip – your mortgage will cost you £250 or £300 per month now for many years to come. As you would expect, we are preparing to have conversations to help customers in that regard. It has not started yet but it will inevitably come over the course of the next 12 months.”

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On the other side the savings market has “woken up” since the base rate started to rise. Mr Denton, who noted that the mutual is focused purely on the mortgage and savings markets, said until recently people were holding large balances in current accounts because rates were so low. Now people are looking again at whether they can make their savings tax free, and “shopping around” for the best deals. This is making the savings market more competitive, which Mr Denton welcomes “hugely” given the current rate of inflation.

Moreover, as a mutual, he said members (customers) of the Scottish Building Society are rewarded with “typically higher rates than they would be able to get on the main high street”.

Mr Denton added: “That is essentially our return to our owners. There are no dividends to shareholders – it is essentially just a higher savers’ rate back to our members.”

Despite the turbulent backdrop, Mr Denton appears satisfied with the progress that the mutual has made since he became chief executive in 2019, which has included a recent move into providing mortgages in the north of England.

He said: “We do view Manchester and Leeds as having a lot of similarity to Glasgow and Edinburgh, and that expansion territorially has helped us as the market started to drop off over 2022. We have a bigger territory, a strong brand and our growth continues. We are really pleased with that particularly as we go into our 175th year.”

He said focus has been placed on establishing the Society’s brand and highlights that its staff personally underwrite all of the mortgages it provides, without relying on computer algorithms or credit scoring to process applications – “a key differentiator”.

Mr Denton said: “That offers us a good sector of the market whereby we can understand people’s personal incomes and all the different forms [in which] that may come, or we can take a different view on different types of housing. Our brand has seen really strong growth over the course of the last few years. We have seen double-digit growth for what will be three years – we are almost at the end of this financial year and I can already comfortably say we will see double-digit growth again this year.”

The most up to date results for the Society, which has more than 80 staff and six branches across Scotland, show that it grew mortgage balances to £453.7m in the 12 months to January 2022, up from £409.2m, while savings balances increased to £463.9m from £436.7m. Profit before tax rose to £2.4m from £800,000.

Mr Denton added: “It is an interesting time for financial services, because we do recognise that as the base rate rises, margins will change, and we will post good profits this year. We are very pleased with that but we are equally modest, because it is a time when many people will be struggling from a cost of living perspective.”

Q&A

What countries have you most enjoyed travelling to, for business or leisure, and why?
I was in Japan for the rugby world cup in 2019. Beautiful country with very clean cities, great infrastructure and very polite people.

When you were a child, what was your ideal job? Why did it appeal? 
I was always good at maths so I wanted to be an accountant or 
a stockbroker. I ended up becoming a banker because it paid more than 
going to university at 17.

What was your biggest break in business?
I found a mentor at a young age and became his executive assistant, long before mentors and executive assistants were what they are today. He taught me a huge amount about managing and motivating senior people.

What was your worst moment in business?
I worked at RBS for 24 years and without knowing it became institutionalised. As soon as I moved on I realised how many opportunities are out there and I regretted not doing it 10 years sooner.

Who do you most admire and why?
I have huge admiration for people who make a difference in the world. Steve Jobs said in 1997 it was the crazy ones who change the world and he was right. 

What book are you reading and what music are you listening to?
I am reading Tim Marshall – The Power Of Geography/The Prisoners Of Geography, a fascinating read that tracks geopolitics over the years and is a real insight into current global challenges. 
I listen to Paul Weller and Oasis.