Frustrated borrowers turn to credit unions

Membership of credit unions, which are not-for-profit and member-owned, has surged in the last three years as consumers seek an alternative to the traditional outlets rocked by the banking crisis. That three of Scotland's biggest credit unions offer mortgages may surprise many of their own members, yet awareness is rising as the search for a lender leads to community banking.

Glasgow Credit Union (GCU), the biggest in Britain, this week revealed that it increased mortgage lending by 43 per cent last year and said it expects further growth of 40 per cent in 2011. The rise contrasted with figures from the Council of Mortgage Lenders showing that lending by banks and building societies reached a 10-year low over the same period.

Paul Mcfarlane, head of operations at GCU, said: "In this uncertain economic climate credit unions remain a real option for individuals, couples and families looking for competitive rates from a reputable organisation. This is mirrored in our increasing membership numbers." Since the downturn began three years ago GCU has seen membership rise by 3,000 people a year, compared to about 1,000 a year previously.

However credit union lending figures are still, and always will be, dwarfed by the loan books that banks and building societies can boast, and getting a loan from a credit union is not straightforward. Not all offer mortgages, and those that do tend to advertise only in branches and on their websites. Of the five UK credit unions that offer mortgages, three are in Scotland - GCU, Scotwest (which recorded a mortgage lending increase of 10 per cent last year) and Edinburgh-based Capital Credit Union.

Credit unions fund their lending entirely with the money raised by pooling member savings, one reason why so few offer mortgages.

Brian Sloan, business development manager at Capital Credit Union, said: "We have to be careful as we need to remain liquid, so we only lend a certain percentage of the savings deposits we hold. If we saw a lot of interest in mortgages we could possibly have to turn people away."

This is why the low awareness of mortgages is partly intentional, with credit unions wary of promoting mortgages heavily and attracting more business than they want or can handle.

But while the rates offered by the big three in Scotland fail to threaten the best buy tables, they are generally competitive.

Scotwest offers one variable rate, at 4.99 per cent, and two fixed deals. Borrowers with a deposit of 25 per cent or more can claim an interest rate of 4.5 per cent, while there is 5.9 per cent for loans where there is a deposit of between 15 and 25 per cent.Glasgow Credit Union, which in contrast to most mainstream lenders will lend up to 100 per cent of the property value, has three mortgage products: a standard variable rate at 4.99 per cent, a two-year fix at 4.75 per cent and a five-year fix at 5.89 per cent.

Capital Credit Union has just one mortgage, a 4.75 per cent standard variable rate loan for borrowers with a deposit of 15 per cent or more. The size of the loan must be between 50,000 and 150,000. All three unions have a maximum income multiple of 3.5 times gross salary.

Melanie Bien, director of independent mortgage broker Private Finance, said that with traditional high-street lenders demonstrating a reluctance to lend, less traditional sources such as credit unions, are increasingly stepping into the breach.

However she added a note of caution: "This could be an obvious solution but borrowers need to ensure they compare what is being offered with what else is on the market so they get the right deal for their circumstances and don't pay more than they need to.

"Rates tend not to be as competitive, plus there may be hidden nasties such as hidden lending charges."

Some mortgage brokers have expressed concerns over the rise of mortgage lending by credit unions. They point out that if mortgages are given to just a minority of members but account for a large proportion of the union's loan book, the union is potentially heavily exposed to a run of defaults by members. But Rod Ashley, chief executive of Scotwest Credit Union, said that the organisation's focus on affordability and its personal approach, with applications for mortgages assessed in face-to-face meetings, were enough to allay the concerns over the risks taken.

"We guide applicants through all stages of the lending process and our decisions don't solely rely on credit scores, which I think is why more people are coming to us to investigate mortgages."

The union considers each applicant individually, analysing their credit history, income and expenditure and building an accurate profile of what they can and cannot afford, according to Ashley.

"Ultimately, our main priority is to make sure that the loan is affordable in terms of repayments as we take our position as a responsible lender very seriously," he said.