Building societies

3 key takeaways

• Building societies are mutual institutions owned by their members, focusing on savings and mortgage lending.
• They offer competitive interest rates on savings and loans, often better than those provided by traditional banks.
• Profits are reinvested into the society or distributed among members, enhancing member benefits.

What is a building society

A building society is a type of financial institution that operates on a mutual basis, meaning it is owned by its members rather than shareholders. Building societies primarily focus on providing savings accounts and mortgage lending services. Members benefit from competitive interest rates and a community-focused approach to banking. Unlike traditional banks, building societies reinvest profits to improve services and offer better rates to their members.

Importance of building societies

• Member Ownership: Members have a say in how the society is run, ensuring that their interests are prioritized.
• Competitive Rates: Typically offer better interest rates on savings and loans compared to traditional banks.
• Community Focus: Emphasize serving local communities and contributing to their development.
• Profit Reinvestment: Profits are used to enhance member benefits and improve services.

How building societies work

Member Ownership and Savings

Building societies are owned by their members, who have voting rights and can influence how the society is managed. Members join by opening a savings account or purchasing shares. The savings pooled from members form the capital used for lending and other financial services.

Mortgage Lending

The primary service offered by building societies is mortgage lending. Members can apply for home loans, which are funded by the collective savings of other members. The interest paid on these mortgages generates income for the society.

Profit Distribution and Reinvestment

Building societies reinvest their profits to improve services, offer better interest rates, and enhance member benefits. Some of the profits may also be distributed among members as dividends, depending on the society’s policies and performance.

Examples of building societies

• Nationwide Building Society: One of the largest building societies in the UK, offering a wide range of financial services, including savings accounts, mortgages, and insurance.
• Yorkshire Building Society: Provides competitive mortgage rates and savings products, emphasizing community involvement and member benefits.
• Coventry Building Society: Known for its customer service and competitive interest rates, focusing on helping members achieve home ownership.

Real world application

Building societies have played a significant role in promoting home ownership and financial stability within communities. For instance, a family looking to buy their first home might choose a building society for its competitive mortgage rates and community-focused approach. By joining the society, they not only secure a mortgage but also become members with voting rights and the opportunity to influence the society’s future direction. The interest they pay on their mortgage helps fund loans for other members, creating a sustainable cycle of financial support and community development.

In recent years, many building societies have adapted to modern banking needs by offering online services and expanding their product range. For example, a young professional might open a savings account with a building society to benefit from higher interest rates and the reassurance that their money is being managed by a member-focused institution. The building society uses these savings to fund mortgages and other loans, reinforcing its commitment to helping members achieve their financial goals. This model not only fosters financial growth for individuals but also strengthens the overall economic health of the communities they serve.