What’s a building society and how do they work?

Ever found yourself wondering what’s the difference between a building society and a bank? Which one is better for your needs? Here’s everything you need to know.

Ever found yourself wondering what’s the difference between a building society and a bank? Which one is better for your needs? Here’s everything you need to know.

Daniel Evans
Mortgages expert
minute read
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Posted 7 MAY 2021

What’s a building society?

A building society is a financial institution that offers many of the same products and services as a bank, with a particular focus on savings and lending for mortgages and loans.

Building societies don’t just exist to turn a profit – they’re there to help people achieve their life goals. The money that building societies make is reinvested in the business, meaning they can offer more loans and better interest rates.

Many homeowners have clambered onto the housing ladder thanks to building societies. Between July and September 2020, building societies were behind nearly a third of all UK mortgage loans.

Building society vs bank – what’s the difference?

The main difference between a bank and a building society is that building societies are owned and run by their members – the people who bank, save and borrow with them. In other words, you.

Banks tend to be floated on the stock market, meaning they’re owned by shareholders.

What are the advantages of using a building society?

Building societies have a couple of advantages over the banks:

  • Building societies are more likely to lend to ‘riskier’ borrowers
    Building societies will often lend to people that the major banks consider risky. For instance, if you’re older, self-employed or taking on a self-build project, you might find that a building society is more willing to give you a loan.
  • Better interest rates
    Since building societies don’t have to pay dividends to shareholders, they can typically offer better interest rates than banks.
  • Do building societies offer any benefits when taking out loans or mortgages?
    If you’re planning to take out a loan or mortgage, you may find that a building society offers a more competitive interest rate. It’s definitely worth checking out all the options.

If you’re taking out a mortgage, you might find a building society views you in a more generous light if you’re a first-time buyer, have a small deposit or work in the gig economy.

What are the disadvantages of using a building society?

There are some areas where banks do better than building societies:

  • Banks tend to offer a larger range of products than building societies
  • There are far fewer building societies than there used to be, giving you less choice
  • Many building societies don’t offer current accounts

How many building societies are there in the UK?

Today the UK has 43 building societies and six major credit unions, far fewer than there were in the building society’s heyday. Back in 1910, there were no fewer than 1,723 building societies.

These days many former building societies have become banks, where they are answerable to shareholders rather than their members.

What’s a credit union?

A credit union is a community venture, where people who don’t meet the criteria for bank loans pool their money so they can lend to each other. Credit unions are run by and for their members. The interest they can charge on loans is capped at 3% a month.

Who are the big name building societies? 

Nationwide is the largest building society in the world and the UK’s second-biggest mortgage provider. Other big names in the field include the award-winning Coventry Building Society and the Yorkshire Building Society, which is committed to many worthwhile charitable ventures, such as ending youth homelessness.

A history of the building society 

Back in the eighteenth century, it was only the wealthy who had access to banking and other financial services. If you were working class, you often had to struggle by in insecure and unsafe housing. An idea for a Mutual Society was born, allowing ordinary people to borrow money they could use to buy land and build their own home.

The first building society was set up in Birmingham in 1775. Others soon followed. Nationwide – or, as it was then known, the Provident Union Building Society, came along some 70 years later, in 1846.

What types of account do building societies offer?

Some building societies, like Yorkshire and Coventry, only offer savings accounts and ISAs. Others, like Nationwide and The Cumberland, for example, offer current accounts as well as savings accounts and ISAs.   

What’s the future of building societies?

Building societies are sometimes seen as a bit old-fashioned. In recent years, many have converted to banks, making them no longer answerable to their members. Some of these building societies-turned-banks took a hit in the 2007 financial crisis, when Northern Rock, Alliance & Leicester, and Bradford & Bingley all failed.

Even so, with their expertise in savings and mortgages, and commitment to their members, building societies still serve an important purpose.

Which is safer – banks or building societies?

Before the 2007 financial crisis, it seemed unthinkable that a bank or building society could go under. Now we know it’s a possibility, we’re understandably more cautious.

That said, the average saver needn’t worry too much. The Financial Services Compensation Scheme (FSCS) will protect your savings up to £85,000 if your bank, building society or credit union goes out of business.

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