Banks and Building Societies are an integral part of helping us to manage our money.
They look after our hard-earned cash, offer lending solutions, and pay interest on in-credit balances on selected accounts.
Are you thinking of opening a current or savings account, or perhaps taking out a mortgage?
I’ve personally used both banks and building societies for various personal financial services over the years.
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What’s the Difference Between a Bank and a Building Society?
The primary difference is that banks are typically public limited companies listed on stock markets and owned and run for the best interests of shareholders. Building societies are not publicly listed and are instead owned by members. A member of a building society is anyone who has open an account or taken out a mortgage.
Banks therefore often focus on making a profit from their shareholders and pay out a share of the profits in the form of dividends to those shareholders.
Building societies do not have to pay profits out to shareholders and can therefore reinvest in the business and offer members better savings rates and lower mortgage rates.
Building Society vs Bank
Before looking at the difference between bank and building society and pros and cons of each, lets first define exactly what is a financial institution is and do in their own right.
What is a Bank?
A high street bank is a financial organisation that works to store and keep its customers’ money safe.
According to the Bank of England, money safekeeping through banking dates back to ancient Greek and Roman times. Let’s face it, your money is a lot safer in a bank than under your mattress.
While most banks offer this basic service for free, it also means that they’re able to collate all the deposits from their customers and lend that money to those who need to borrow it.
Money that is then paid back, with interest, making a profit for the bank. The higher the risk for the bank, the more interest they charge to cover any losses.
Of course, they also pay interest on savings accounts and some current accounts, meaning you can earn income in return for storing your money with them.
What is a Building Society?
A building society is actually a mutual institution. Which means it’s owned by its customers rather than by shareholders.
Traditionally, the purpose of a building society was to offer mortgages and savings accounts to its customers, but they now also provide current accounts, credit cards and loans.
However, where high street banks are listed on the stock market and pay dividends to their shareholders, a building society isn’t and doesn’t, due to its status as a mutual institution.
This means Building Societies are generally able to offer more competitive rates of interest to their customers by investing the profits back into the building society.
Also, depending on the building society, they may offer their services locally or nationally.
Advantages and Disadvantages of a Bank
With so many banks now available to choose from, it’s easy enough to find one to suit your needs. Whether that be a basic bank account or a bank account for those with a poor credit history. There are even accounts that offer rewards or perks, such as cashback, discount on eating out or shopping, and insurance products.
In the current economic climate, interest rates are at an all-time low, which means you won’t necessarily get a great return on your money. Especially when you consider the rate of inflation. (However, your money is still better off in an account earning a small amount of interest than physically being stored at home, losing value.)
Also, customer service can be a bit hit and miss. Google any bank’s reviews and you’ll find a range of ratings to indicate how well some banks respond to a customer’s needs.
Advantages of a Bank
- Several different products to choose from (current accounts, reward accounts, savings accounts)
- Access to borrowing funds
- Ability to earn interest on your credit balance
- Safe (protected by the Financial Services Compensation Scheme up to £85,000)
- Low-interest rates giving a less favourable return on your money
- Customer service levels may vary
Advantages and Disadvantages of a Building Society
The main focus on the difference between banks and building societies has to be the fact that building societies are mutual institutions owned by, and for, their customers.
As previously mentioned, the absence of paying dividends to shareholders means that building societies can generally offer higher interest rates.
The fact they are mutually maintained also means that the primary focus is on the owners: AKA the customers.
However, due to the introduction of demutualisation in the 80s (where building societies changed from member-owned to shareholder-owned PLC banks), there aren’t as many to choose from as there are banks.
- Potentially higher interest rates
- Funds protected by FSCS up to £85,000
- Generally, greater customer service levels
- Not as wide a range of accounts available as with banks
- Not a huge range of building societies to choose from
Is a Bank or Building Society Best for Mortgages?
There is a variation in rates between banks and building societies when it comes to offering mortgages. If you have a small deposit, a building society is likely to be the better option for introductory rates. This works well for you if you’re a first-time buyer looking for a mortgage with a 90% – 95% LTV (loan-to-value ratio).
However, if you have a larger deposit or are looking to remortgage, a bank may be the better option due to their competitive rates for 2-year fixed deals, as outlined in this article by Which?. You need to consider additional fees beyond the introductory rate, too. While an initial low-interest rate may appeal, check the revert rate and arrangement fee.
For self-employed people, a building society may also be a better option due to its manual approach to underwriting. They’ll consider your overall financial situation when considering a mortgage application.
Is a Bank v Building Society Best for Savings?
As discussed previously, a building society may offer more competitive rates when it comes to paying interest, due to their nature as a mutual institution and not paying dividends to shareholders.
Like banks, they’re also covered by the FSCS, so your money is protected.
However, there will always be some reasonable deals out there with banking institutions as they compete to manage their customers’ money.
A good comparison website will be able to help you choose the best option for you. Bear in mind that the interest rates will also differ depending on the level of access you require, such as easy/instant access or fixed-term savings.
Ultimately, it pays to do your research. Taking into consideration the points outlined here, do some investigating into the different types of accounts you might choose.
Check the interest rates and any applicable fees, and check customer service levels. Above all, whether you choose a bank or a building society, make sure you are getting the best return on your money.
These days in addition to high street banks and building societies there’s a whole range of really good savings apps in the UK that you can use in various ways to increase your savings and in some cases earn interest.
Check out our post to see how much interest you earn on a million pounds.
Bank and Building Society Switching Deals
I have actively made money numerous times simply switching bank accounts for the new customer incentive deals.
You can typically expect £100-£150 a time. My highest paid switch was £250.
Predominantly I have switched to banks, but I have also profited from switching to Nationwide Building Society.
Some banks and building societies, including Nationwide, also offer customer incentives to recommend friends to switch. If the recommended switch successfully goes through you can typically receive in the region of £75 to £100 each.
See my switching banks for money guide for information on how to set yourself up as well as the latest deals.
Most Well Known Building Societies
There are over 40 Building Societies in the Uk, many with only 1-3 local branches.
Britains 10 most well-known building societies in order of size are:
- West Bromich
- Newcastle and Cumberland
Is Santander a Building Society?
Santander is a bank, not a Building Society. However, formerly known as Abbey National it was the first UK building society to demutualise and become a bank in 1989.
It was subsequently taken over in 2004 by Spanish owned Santander Group. In combination with the Savings business of Bradford and Bingley is was rebranded Santander Uk in 2010
How many Building Societies are there in the Uk?
As of 2020, there are 43 UK Building Societies. You can see a list of them in order of Group Asset size here.
Is a Building Society Better than a Bank?
With a new breed of online-only banks, it is impossible to say broadly whether any particular building societies are better than banks.
Ultimately whether you are looking to maximising the interest on your savings or find the cheapest loan or mortgage available to meet your financial needs you should compare them all.