What is a Building Society?

Building societies are mutual organisations, which means they are owned by their customers. They offer current and savings accounts and mortgages so they can be an alternative option to a traditional bank.

by Ruth Jackson-Kirby

Edited by Richard Eagling

Updated 16 February 2021 4 minutes read

Owned by their members, building societies are not public companies and do not have any shareholders. As a result, they don’t have to focus on making a profit for shareholders which means that profits can be invested back into the business instead. This enables building societies to offer more competitive rates to their members.

When you open an account with a building society you become a member. This means you can, if you choose to, have a say in how the building society is run by voting for the election of any directors and attending the annual general meeting. You could even nominate yourself to become a director. But you don’t have to do any of these things. You can just open an account and leave the running of the business to other people.

What is the difference between a bank and a building society?

There are several important differences between banks and building societies. As we said above building societies are mutual organisations. Banks are not, they are public companies and usually are listed on the stock market. This means they are run for the interests of their shareholders rather than their customers with a focus on making money for their investors.

There is also a difference in how banks and building societies can raise funds. Building societies are not allowed to raise more than 50% of their funds from the wholesale market. The rest must come from deposits from savers which gives building societies another incentive to offer market-leading interest rates – they need savers so that they have money to lend.

How does a building society make money?

If you open an account with a building society, you will be paid interest on what you deposit. Your money will then be used to fund lending to other people who want a mortgage. The people with a mortgage pay a higher rate of interest on the loan than the interest rate the building society is paying you for your savings. The extra money the building society is making from the mortgage interest is the profit.

What kind of interest rates are offered by building societies?

The different ownership of a building society compared to a bank means they tend to have lower overheads, so they may be able to offer lower rates on mortgages and higher interest rates on savings accounts.

Research in 2020 by Savings Champion found that the average interest rate offered to savers by building societies was 1.07%, compared to 0.84% from the average bank.

The figures are slightly skewed by the fact the big-name high street banks are notorious for offering low interest rates on their savings products. They assume – often rightly – that many of us are too lazy to look beyond our current account provider for a savings account. Some banks do offer market-beating interest rates, but these are often the smaller lesser-known banks.

However, the stats certainly suggest that you should consider your local building society when looking for the best return on your savings. Find out more with our guide to choosing a savings account.

How do I open a building society account?

Your first stop should be a financial comparison website to find out which account is the best one for you. Once you’ve chosen your account you should be able to apply either online, over the phone, by post or in branch depending on the account.

You may need to provide proof of your identity and your address. This can be your passport, driving licence, bank statements and/or a utility bill. Find out more with our guide to opening a bank account.