Mutual attraction: How small building societies beat the banks

19 April 2018

Everyone likes to get the best rate for their mortgage or savings, but sometimes you want a lender that offers flexibility and a more community-led approach, and this is where building societies – and especially the smaller ones – can excel.

Building societies have been part of the fabric of British society for hundreds of years. The first building society is thought to have been the Golden Cross, which was founded at the Golden Cross Inn at Snow Hill, Birmingham, in 1775.

The idea behind these early building societies, which were located in the Midlands and the North of England, was for people to save collectively towards the cost of building a house. It was fuelled by the need for more housing in the wake of the Industrial Revolution and by the fact that, before 1918, men needed to own a property if they wanted to vote.

Members of these ‘terminating’ societies, which means they were wound up when all their members had been housed, saved into a common fund each week until they had enough money to build their first house. The owner of each house was decided by ballot, with everyone paying into the society until all members had been accommodated.

People soon recognised that permanent building societies could be used to build up their savings, while providing loans to potential homeowners. This led to the formation in 1845 of the first permanent building society – the Metropolitan Equitable.

Today’s oldest societies are the Scottish, which dates back to 1848, and the Ipswich, Saffron and West Brom, all founded in 1849. But there is still room for newcomers – the Ecology Building Society is just 37 years old.

While a bank is owned by shareholders, such as institutional investors, a building society is owned by its savers and borrowers, who are its members. Confusingly, building societies are also known as ‘mutuals’, but this simply means they are owned and run for the benefit of their members.

As a member, you will have the chance to vote at the society’s annual general meeting (AGM) on issues including directors’ pay (see below). In contrast, only the shareholders of banks will have voting rights.

But nostalgia about their humble beginnings doesn’t mean you should join your nearest building society unless it offers the best products for your needs. As with any financial service, you need to research what’s right for you.


Smaller building societies tend to offer borrowers niche products – and a more personalised decision-making process – that can suit home buyers who don’t fit the mould. They can, for example, be more flexible about helping borrowers with a checkered credit score history.

Ray Boulger senior technical director at broker John Charcol, explains: “Where building societies come into their own is with people who are good quality but, for whatever reason, may not have a good credit score. Smaller building societies employ human underwriters who will look at the case on its merits. They will be able to pick up on that case whereas the bigger lenders may simply reject it.

“[Computer] algorithms are fine for straightforward, black-and-white cases; it’s the grey cases where they don’t work so well. We might have a client with no adverse credit history who should qualify for a mortgage, but perhaps they’ve moved home four times in the past three years; they’ve changed jobs recently; and they have no credit cards or loans. These are people a smaller building society would be happy to lend to, while bigger lenders might not.

“There are a number of small lenders, such as Bath, Harpenden, Market Harborough, and Penrith building societies, which are particularly good at looking at cases outside the box. These are the lenders we tend to talk to when we have a good-quality client whom we know won’t tick all the boxes.”

Gev Lynott, chief executive of Mansfield Building Society, says. “Building societies are more prepared to say: ‘OK, you used a lot of payday loans – why was that?’ If you’ve had a diffi cult time in the past, so long as it was some time ago, we will consider you.”

However, David Hollingworth, associate director, communications, at broker London & Country (L&C) Mortgages, points out that larger lenders will still suit borrowers who are after a best buy.

“I’m a fan of what the smaller building societies bring to the table and their ability to offer something a bit different.

“However, we can’t ignore the fact that the big banks – and building societies – do make up a large proportion of lending and most borrowers are simply after the best deal for them, irrespective of the type of institution.”

Smaller building societies also often lack the resources to build a good online presence, so if you’re in a hurry to apply for a loan you could be better off picking a major lender.

“If you're switching products and not looking to increase your loan or term, it could all go through extremely quickly [via an automated system]. This is an area where the big boys will score in terms of spending less time on administration,” says Mr Boulger.

Mortgages for retirees

If you are an older borrower, smaller societies can be your only option. Currently, 34 out of the 44 building societies will lend to older borrowers (aged up to 80 or 85), with 16 imposing no age limit at all.

Mr Hollingworth adds: “Taking a more flexible approach to older borrowers is a good example of where smaller societies have tended to lead. Most lenders will lend into retirement where it will be affordable, but many lenders will still cap their maximum age at 75 or even below.

“Smaller societies may offer a maximum age of 80 or 85 and although some of the bigger lenders have started to extend their upper limit (Halifax to 80 and Nationwide to 85 for retired borrowers), there are a number of smaller societies with more forgiving criteria or specific products.”

Niche products

Meanwhile, there are two special interest societies: the Ecology Building Society – which specialises in lending for ecological new-builds, renovation of derelict buildings and energy-saving improvements to existing buildings, as well as focusing on affordable and community-led housing – and the Teachers Building Society, which focuses on helping education professionals.

Building societies also have a good track record in offering first-time buyer mortgages that incorporate parental help – for example, Bath and Loughborough building societies’ Buy for Uni mortgages.

Dick Jenkins, chief executive of Bath Building Society, says: “We have developed products to help people who wouldn’t otherwise get on to the housing market. We will lend 100% loans to students to buy a house while at university. We take a second charge over Mum and Dad’s house, so they don’t have to fork out a lot of cash and can use the equity, which is effectively sitting there doing nothing,” he says.

While building societies generally offer mortgages to anyone in England and Wales, some make a point of offering more favourable terms to locals. For example, the Cumberland will offer some products only to customers in its local area.

Mr Lynott of the Mansfield adds: “We are keen to help people get off the rent treadmill. We will offer products that are low deposit, with help from the Bank of Mum & Dad. But what we fi nd is that, even with this, some people are really tight for money.

“To help support them, we will typically waive the valuation fee and a local-customer-only product also offers cashback. What we’re saying is: ‘If you’re local and support the Mansfield, then we’ll support you on to the housing ladder.’’’


Figures produced at the end of 2017 by comparison website Savings Champion reveal that cash saved with building societies earned an average interest of 0.95% compared to 0.69% in banks. For customers opening up a new savings account, the difference was even more marked: building societies offered an average return of 1.04%, compared with 0.7% at banks.

In addition, researchers found that 71% of building societies paid above the Bank of England base rate of 0.5% on £10,000 worth of savings, compared with 47% of banks.

However, Savings Champion adds that smaller so-called challenger banks can also come up with competitive deals. Always compare products before signing up – for Moneywise’s best buys, visit

But Tom Adams, head of research at Savings Champion, points out that some savers are as concerned about how their savings are used as they are about receiving top returns.

“In today’s climate, where there is a lot of talk about what banks do with your money, for some people an ethical or local concern can be important,” he says. “While there might be a compromise on rates, some savers want to look more deeply at where their money is deposited.”

Another way that smaller building societies differ from larger lenders is that when a savings product becomes very popular, they may start restricting it to local and existing customers.

Mr Adams adds: “It harps back to the original purpose of building societies – looking after their core customers. But it can be a source of frustration for other savers – particularly if the deal was available to all up until recently.”


When it comes to community-led activities, smaller building societies tend to focus on local charities that can struggle with funding. For example, Cambridge Building Society supports Wintercomfort, a daycentre for the homeless in Cambridge.

Others may want their savings to be used on projects that have a positive impact on the environment – as is the case with the Ecology Building Society.

Mr Adams adds: “Not many banks have such a strong ethical stance, except for, perhaps, Triodos Bank. Building societies are arguably the most outwardly ethical – but that’s not to say that others don’t do good work.”

‘We had to be willing to compromise’

Four families have recently moved into a contemporary block of flats in Bath Street, in Edinburgh’s Portobello district, having been involved in the design and build of their own low-energy flats in a tenement-style block.

Registering themselves as the Bath Street Collective Custom Build, the families approached Ecology Building Society for a community-led housing mortgage to finance the building works. The funds were released to the group in stages as the build progressed.

“At various stages of the development, financially whoever was able to put something in the pot would do so,” explains Lindsay Perth, 48, and an artist, who has moved in to the block, with her partner, Ian Dewsbery, 49, a cartographer and designer (pictured outside the block).

“The bathroom, kitchen and bedroom layouts were ours to create, which enabled us to use lots of natural materials. This has resulted in a comfortable, open-plan living space, quite unlike that in most tenements, which reflects how we want to share space as a family.

“Being in a collective of four families did have its drawbacks as we had to agree on issues before we could engage with builders and planners. A willingness to compromise was critical.”

The building is highly energy-efficient and fossil-fuel free. There is no central heating system and all electricity is generated via on-site photovoltaic panels or procured from 100% renewable energy.

 ‘Without a lodger, I would have had to sell up’

Claire Woodhouse, 37, lives in a three-bedroom terraced house in Bath, after taking out a Rent a Room mortgage with Bath Building Society.

Claire, who works in property management, says: “I originally bought the property with my ex in 2009 and then I bought him out when we split up in 2016. I approached normal mortgage companies, but they wouldn’t lend me enough money. Then I stumbled across Bath’s Rent a Room product, which would take one lodger’s income into consideration. Without it, I wouldn’t have been able to buy my ex out.

“I get about 80% of the cost of my mortgage through the rental income, so it pays quite a chunk of the repayments and the income is tax-free as it’s under the government threshold of £7,500 a year.

“I advertised for a lodger on Spare Room while I was applying for the mortgage. Before the mortgage was signed off, I’d found someone and drawn up a lodger’s agreement with her.

“Without Bath’s scheme, I would have had to sell up and that would have been quite traumatic when you’re also going through a break-up,” she adds.

‘Lenders said I was too old for a mortgage’

Peter Capstick, 70, who is retired, was turned down by two lenders when he applied to switch mortgages on his home in Lancaster.

“I had been with my original lender for a long time and had transferred my mortgage three or four times. Previously, my lender had suggested it would extend my mortgage beyond age 70 or 75,” Peter explains.

“But when I tried to do this, it said: ‘No, we know how much savings you have; you can afford to pay it off’.

“As I had a few health issues, I wanted the flexibility of having savings in the bank – I’d already had to convert my bathroom into a shower room. But it just wasn’t interested,” he adds.

A second bank gave Peter a mortgage, but it was unhelpful when he later asked to switch to a cheaper deal.

“It said because of my age and because it doesn’t like interest-only mortgages I would have to pay the higher rate,” he says.

Peter then approached Cumberland Building Society, which has no upper age limit for borrowers and operates in Cumbria, west Northumberland, south-west Scotland and north Lancashire. 

“At the Cumberland, it was a case of: ‘The screen says this, but I will get in touch with the underwriting team to see what we can do,’” he adds.


As the 2018 round of building society AGMs kicks off in April, it’s worth looking out for voting forms if you want a say over issues that could directly affect you.

At a time when savings rates have been minuscule, it is your chance to speak out against the ‘fat cat’ remuneration packages secured by some building society bosses. 

It’s also worth noting that many building societies offer a charitable donation – generally between 20p and 50p – for each vote cast. Last year, building societies raised over £100,000 through AGM-related voting donations, according to industry trade body, the Building Societies Association.

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