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What is a building society and how do they work?

Ever found yourself wondering what’s the difference between a bank and a building society? What are the advantages of building societies and could one be better for you? Here’s what you need to know.

Ever found yourself wondering what’s the difference between a bank and a building society? What are the advantages of building societies and could one be better for you? Here’s what you need to know.

Written by
Sajni Shah
Consumer expert on money and utilities
Last Updated
18 MAY 2023
4 min read
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What is a building society?

Building societies offer many of the same products and services as banks, but with a focus on savings, and lending for mortgages and loans.

However, building societies aren’t just there to turn a profit – they’re there to help people achieve their life goals. The money building societies make is reinvested in the business, allowing them to offer more loans and better interest rates.

Many homeowners have clambered onto the housing ladder thanks to building societies. Between July and September 2022, building societies were behind 26% of all UK mortgage loans.

 

Banks vs building societies. 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, so are owned by shareholders.

What are the advantages of building societies?

Building societies have a couple of advantages over banks:

  • They’re more likely to lend to ‘riskier’ borrowers
    Building societies often lend to people that major banks consider high risk. 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.

    If you’re taking out a mortgage, a building society may view you in a more generous light if you’re a first-time buyer, have a small deposit or work in the gig economy.
  • They often offer better interest rates
    Building societies don’t have to pay dividends to shareholders, so can generally offer better interest rates than banks.

    If you’re taking out a loan or mortgage, you may find a building society offers you a more competitive interest rate.

What are the disadvantages of building societies?

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
  • Building societies tend not to offer current accounts.

How many building societies are there in the UK?

According to the Building Societies Association (BSA), the UK has 43 building societies and seven credit unions – far fewer than there were in the building society’s heyday. Back in 1910, there were 1,723 building societies.

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

Who are the biggest building societies?

Nationwide is the largest building society in the world and the UK’s third-largest mortgage provider. Other big names in the field include the Coventry Building Society and the Yorkshire Building Society. Both are committed to many worthwhile charitable ventures, such as ending youth homelessness and helping refugees across the UK.

A history of the building society 

Back in the 18th century, only the wealthy had access to banking and financial services. Meanwhile, the working class 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’s the future of building societies?

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

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

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, offer current accounts as well as savings accounts and ISAs.

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Frequently asked questions

How do building societies make money?

The interest rate building societies pay on savings is lower than the rate customers pay on their mortgages. This difference is the building societies’ profit.

How safe is my money in a building society?

The Financial Services Compensation Scheme (FSCS) covers banks and building societies authorised by the Prudential Regulation Authority. That means you’re covered (for deposits up to £85,000) if your financial service provider goes under.

What happens if a building society changes to a bank?

In the past, when building societies have become banks, they’ve given their members shares to either keep or sell. But there are potential downsides: for example, mortgages can become more expensive.

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.

Which is safer? A bank or building society?

Both are regulated by the Financial Conduct Authority (FCA) so the the average saver needn’t worry too much. It’s worth knowing that the Financial Services Compensation Scheme (FSCS) protects your savings up to £85,000 if your bank, building society or credit union goes out of business.

Car Finance 247 Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged over 18 or over. Credit is subject to status and eligibility.

Sajni Shah - Consumer expert on utilities and money

Sajni is passionate about building products, allowing Compare the Market to help you make great financial decisions. She keeps track of the latest trends and evolving markets to find new ways to help you save money.

Learn more about Sajni

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