What is a building society?

If you’re looking for financial products such as savings, a mortgage, or a current account then you have a wide choice of providers to consider.

Building societies are common on the high street and can be a great choice. But what is a building society? What’s the difference between a building society and a bank? And which will give you a better deal? Keep reading for answers to these questions and more.

What is a building society?

A building society is a ‘mutual’ financial organisation that is owned by its members. When you have an account with a building society you become a member, meaning you have a say in the way the business operates.

The first building society was set up in the UK in 1775. Originally, these societies were created by people who wanted to help each other buy property. Members would pay into the society every month and this money would be used to build houses for members.

These days, building societies offer savings accounts which allow you to earn interest on the money you deposit. Societies then lend this money to people looking to buy a house in the form of a mortgage. Many building societies also offer other financial products such as insurance and investments.

Difference between a bank and a building society

Building societies are set up as ‘mutual’ organisations, designed to benefit their members. Members get certain voting rights on matters affecting the society.

Banks, meanwhile, are normally stock market-listed companies which are owned by, and run for, their shareholders.

Examples of building societies

Over recent years the number of building societies in the UK has dwindled. Some, including big names such as Halifax and Alliance & Leicester, have ceased to operate for the benefit of the members (called ‘demutualisation’). Other societies have been swallowed up by bigger providers in mergers.

However, there are still around 50 building societies in the UK. The ten biggest building societies in the UK in 2017 are:

• Nationwide (the largest building society in the world)
• Yorkshire
• Coventry
• Skipton
• Leeds
• West Bromwich
• Principality
• Newcastle
• Norwich and Peterborough
• Nottingham

There are dozens of smaller societies, many of which operate in a specific geographical area. These range from larger providers such as the Cumberland and Ipswich building societies, down to small operators such as the Penrith, Mansfield and Shepshed building societies.

Bank or building society – which one will give you a better deal?

Both banks and building societies regularly appear in ‘best buy’ tables and so it is always worth considering both types of provider when you’re looking for financial products.

Data has shown that because building societies don’t have to pay dividends to shareholders, they can often offer better deals on both savings and mortgages.

Building Societies Association (BSA) data shows that savers with building societies received an average of 1.58% on fixed rate and notice accounts across 2016, compared to an average of 1.30% from banks.

On instant access accounts, savers with building societies received an average rate of 0.88% in 2016, compared to the bank average rate of 0.65%.

A 2017 study published in Daily Telegraph found that building societies also offered cheaper mortgage deals. Across various types of mortgage, building societies' rates were, on average, up to 0.66% lower than the equivalent rates offered by banks.

Advantage and disadvantage of a building society

There are a few pros and cons to choosing a building society.

Pros

• You become a member, meaning you can have a say in the way that the society is run.
• You often benefit from a better deal than you would get at a bank.
• Customer service levels are often considered better at a mutual. Surveys generally reveal that trust in building societies is generally higher than trust in banks.

Cons

• Building societies are not as secure as they have historically been. The choice of mutual is falling and failures have become more commonplace.
• Many building societies have geographical restrictions. This means that you can only open an account if you live in a certain postcode or within a certain defined area.
• Building societies often have a restricted choice of products. For example, many don’t offer a current account.