Why you could get a better mortgage deal from a building society

If you're looking for the best value mortgage deal, it could pay to head to a building society rather than a bank. That's the conclusion of a new study which has found that mutual lenders are beating banks to offer the best fixed rate mortgage deals.

The research has found that across a range of mortgage products, the rates on offer from building societies average up to 0.66% lower than the equivalent bank rates.

Building society deals up to 25% cheaper than banks

New research has found that building societies are currently dominating the mortgage 'best buy' tables, offering significant savings when compared to High Street banks.

Some of the biggest savings can be made for borrowers with a 25% deposit looking for a five-year fixed rate. Here, the average rate offered by banks is 3%, while the average rate offered by building societies is just 2.34%. The means mutual rates are 22% cheaper than banks.

For a two-year fixed rate, building societies offer an average rate of 1.74% to customers with a 25% deposit. By contrast, banks offer an average 2.32%, a difference of 0.58 percentage points - or 25%. 

The difference does not take into account upfront fees, which are sometimes higher on the mortgages with lower rates. 

Charlotte Nelson, finance expert at Moneyfacts, said that at the moment five out of six two-year fixed-rate 'best buys' were from building societies. 

For buyers with a 25% deposit, the best rate available is Yorkshire Building Society's two-year fixed rate at 1.23% with fees of £1,200.

The same lender also has the cheapest rate for buyers with a 40% deposit. The mutual offers a deal at 0.98% - a two-year discount from their standard variable rate of 4.74%. There are fees of £1,700.

Building societies more 'flexible' and 'fleet of foot' say experts

The Daily Telegraph reports that if you have a 5% deposit, the best rate is currently from Mansfield Building Society, at 2.94%, with fees of £499. 

Even when fees are taken into account, the eight cheapest mortgages all come from building societies. The cheapest loan from a bank is TSB's two-year fix, at 3.48% with fees of £595.

Experts believe there are two main reasons why mutuals are currently so competitive.

Ms Nelson suggested that building societies were able to be more flexible in their underwriting, meaning they could offer better deals to less 'mainstream' customers, including those with small deposits. 

Mortgage expert Shaun Church believes that recent rises in swap rates – the rates at which lenders borrow money from each other - have affected banks more than smaller building societies.

"Something like that would have a more significant impact on banks, because they are more reliant on capital markets for their funds, whereas building societies tend to lend out depositors' cash. Building societies can also be more fleet of foot and might be capitalising on some of the larger banks pulling back in the short term," he said.