Societies build on success as high street banks pay the price of losing clients’ faith

By Jeff Salway
Published on 08/09/2012 13:37

Whether they’re dominating the best buy tables or reporting massive increases in lending levels, building societies appear to be showing the much-maligned banks how to do it.

Building society mortgage lending soared 44 per cent in July, according to the Building Societies Association (BSA), whereas bank lending reached an 18-month low in June and recovered only modestly the following month.

Building societies are financing their mortgage lending the old fashioned way – by using competitive rates to attract more deposits from savers.

It doesn’t seem so long since building societies were being written off amid a period of consolidation following the banking

crisis. Now they would appear to be back in favour, with some attracting new customers as the reputation of some high street banks took a further battering earlier this summer.

Our perception of building societies has improved dramatically over the past three months, judging by a recent Gfk NOP survey of consumers, commissioned by the BSA.

Building societies and other mutuals clearly outscored high street banks across factors including ethical behaviour, money security, honesty and customer service.

So should customers of banks – who have to keep shareholders happy – consider switching to mutuals, who have their members to answer to?

It depends on what you want from them, including the products they offer. For savers, building societies would appear to be delivering what they want. But when it comes to other products the picture is less clear.

Sylvia Waycot, spokeswoman for Moneyfacts, said: “With so many new players on the market, building societies offering some very competitive savings deals and banks getting their act together on mortgages, you really do have to do your research before

deciding where to place your business, because they all want it.”

What isn’t acceptable is just sticking to the same provider, whoever it is, Waycot warned.

“No-one is good at everything, which means you could be getting a better deal elsewhere,” she said.

Here we look at savings, mortgages, loans and credit cards and ask who’s best – banks, building societies, or other market players, such as the supermarket finance brands.

SAVINGS

The top deals in virtually all types of savings accounts are currently offered by building societies. In some cases – internet savings or regular savings accounts, for example – building societies occupy eight of the top ten positions in the “best buy” charts.

They also offer five of top ten cash Isas – led by the Coventry at 3.25 per cent – while Santander is the only high street bank to feature, Moneyfacts data show.

The other competitive players are supermarket banks, small business specialist Aldermore, Cardiff-based Julian Hodge Bank and overseas names such as Bank of Cyprus. None of the top notice accounts is promoted by a high street bank, while Santander is again the only one to appear in the top ten no-notice table (led by the Derbyshire at 3.06 per cent).

In the fixed rate savings market it’s a slightly different picture – mutuals offer better rates than the big banks, but the top rates are offered by the more niche banking names.

“Building societies are way more competitive in the savings market than the high street banks,” said Andrew Hagger, an independent personal finance analyst.

“Banks have the ability to borrow from the money markets at finer rates than some of the smaller mutuals who have to rely on retail savings balances, hence why they need offer more attractive savings rates just to survive.”

Another factor is that only a minority of building societies offer current accounts. Without millions of pounds of credit balances to use, therefore, most have no option but to compete for savings business.

“Retail savings balances are the lifeblood for smaller building societies and if they don’t compete on rate then they won’t have sufficient funds to lend out as mortgages,” said Hagger.

MORTGAGES

The share of the mortgage market accounted for by building societies has risen sharply over the past year. They advanced more than one in four of all mortgages in July, up from 17 per cent a year earlier, official figures show.

But for all their efforts to pull in savings deposits, building societies still lag behind in terms of competitive mortgage products.

Of the top ten fixed rate mortgages currently available, just one – Principality’s 2.79 per cent two-year deal – is from a building society. The table is otherwise dominated by Lloyds, HSBC, First Direct (owned by HSBC) and the Halifax.

HSBC and First Direct also boast the cheapest variable rate mortgages on the market, although Nationwide Building Society customers who took out their mortgages prior to 2009 are still on its 2.5 per cent standard variable rate. However, the Nationwide, the UK’s biggest mutual, last week bucked the recent trend of falling rates by raising the cost of some of its fixed rate mortgages.

Unlike the savings market, however, rates aren’t everything, said Ben Thompson, managing director of Legal & General Mortgage Club.

“Over the last three months especially, building societies have really led the market in terms of innovation in mortgage products, and we have seen interesting deals including Leeds Building Society’s two-year fixed rate on 80 per cent loan-to-values, which rivals many mortgages offered with LTVs of 75 and 70 per cent.”

CREDIT CARDS AND LOANS

The personal loans market is being led by supermarkets and other non-high street brands, with banks and building societies largely trailing behind.

M&S Money is the cheapest place to get a £5,000 loan over three years, with a rate of 7.3 per cent. Sainsbury’s Bank and Tesco Bank are also prominent. Derbyshire Building Society offers by far the cheapest loans of any mutual, charging just 5.8 per cent to borrow £7,500 or £10,000 over five years. The only banks appearing in the best buy table for personal loans are Santander and Clydesdale, according to Moneyfacts.

The credit card market is harder to judge, given the wide range of factors that determine the rates quoted. On the face of it, however, those shopping around for new credit cards are better off bypassing banks and building societies altogether and looking at deals from the likes of Action Aid, Amazon, Amnesty International and Aqua.