Terminating Deposit

Terminating Deposit

Terminating deposits were a form of savings-and-loan that were one of the key products of the early building society movement in the UK and from there they spread through what is now the Commonwealth. They were banned in the UK around 1910, and are now illegal everywhere, the last vestiges being seen in New Zealand.

The key features were:

1. terminating deposits were open to subscription by depositors for a period of time until the required number of depositors to make it viable had been found. Then the Group as it was known would be closed off and subsequent applicants would be enrolled into the next group.
2. depositors were contracted to make a small deposit on a regular basis e.g. weekly or monthly (similar to insurance savings policies)
3. No interest was received on these deposits
4. whenever the group had enough funds a ballot would be held of all depositors who were up to date with payments. The ballot prize was an interest free mortgage loan for around 60% of the value of a house (in line with the local rules for trustee investments).

Characteristically the groups had a life 20–25 years and no ballots would be held in the 1st 10 years while funds built up. By the time ballots started after 10 years, ballot winners would normally have enough funds saved to cover the 40% contribution to buy a house with the other 60% coming from the interest free mortgage.

As originally established some depositors would never receive a mortgage (win a ballot) i.e. the number of ballots over the life of the scheme was less than the number of depositors.

So why would anyone join a scheme where you might make deposits for 20–25 years and never receive interest on them and simply get the amount you had saved back at the end of the period? The answer goes back to the conditions of the working class at the time they were devised and the working class self-help movement which also gave rise to trade unions, the co-operative movement etc. The time is the late 18th century when the building society movement was starting. Working-class people did not have access to the banking system and critically nor did their self-help enterprises. Accordingly the terminating deposit product had to be designed in such a way that it did not depend in any way on the wider financial markets and in particular it did not involve any borrowing by the building society which promoted it. It had to be totally self-funding at every stage of its life cycle. In its original format ballots were only held when there was sufficient money in the kitty to provide an interest free mortgage to the winner. If there weren't enough funds there was no ballot and this ability to turn off the ballotting tap made the product very resilient. The groups were able to survive prolonged economic depressions by simply not holding any ballots until things got better. Whilst working-class families aspired to own their own home, they didn't have access to the banking system, and they could not realistically expect to save enough in their working life to buy one. Accordingly they were willing to enter terminating deposit schemes which did not guarantee them a house in exchange for their savings but were a mechanism by which some members of the scheme would get one, through the chance element of the ballot.