Mortgages: Bank or Building Society?

When we're choosing between mortgage lenders, we're normally faced with the choice between a bank or a building society. Is there any reason to favour one over the other?

On the surface, there doesn't appear to be a great deal of difference. Both sets of institutions operate branches and provide similar products and services to consumers.

In the background, there's more of a difference relating to structure and ownership. Banks are traditionally owned by shareholders, and therefore hold profit as a strong objective, while societies are owned by their customers (often termed ‘mutuals’), which is seen to give them a more ethical outlook.

But for your two-year fixed-rate mortgage, for example, is this really going to impact upon your decision?

To look at it another way: what might influence your decision between one or the other?

1. Availability

One of the more significant deciding factors may be availability and which lenders are able to lend on a property. It doesn’t matter how good the offers are if the lender is unwilling to lend on a property too far away from one of its branches.

Banks have recently been accused of withdrawing from metropolitan regions to focus upon more wealthy suburbs (read more). And though building societies serve local communities well, several will only lend on properties within a fixed radius of their offices. If you can track down the lenders based within 30 miles of the property, that's a useful basis on which to build your shortlist.

2. Terms and Conditions

Which lenders are willing to lend on a flat in a twelve-storey tower, or a property near a pylon? Are there any specified age restrictions? Lenders can differ quite radically over what they are willing to lend on and who they are willing to lend to.

The terms are likely to differ according to the type of lender. For example, the minimum loan stipulated by a smaller lender may depend on the distance between the property and its Head Office. This is less likely to be an issue with major banks or the Post Office with their much greater coverage.

But there may be a case to say that building societies are more likely to make exceptions for members because not all lending applications will be churned through a central electronic decision-making process. Even the new TSB Bank, which promised ‘local banking’ upon its launch, has had to concede that lending decisions are made centrally and cannot be overruled.

3. How the Rates Compare

Mortgage rates are subject to many different factors, some of which include the stock market, central monetary policy, an institution’s operating costs, and the inter-bank lending rate (Libor).

Government lending schemes have helped to drive down the cost of mortgages. So, how do banks and building societies compare in this environment? Let’s compare the cost of the best two-year fixed-rate mortgages at different loan-to-value categories. (Products listed are accurate to September 2013 and are subject  to change.)

60% / 65% LTV

70% / 75% LTV

80% / 85% LTV

From this example, banks and building societies appear to be roughly on-par with each other in this competitive environment. It should be noted, though, that arrangement fees can be hugely influential in turning a great rate into a less competitive one. This is especially the case with lower loan-to-value loans.

With consumers now becoming more astute to the impact of arrangement fees, lenders are now beginning to offer more 'tiered' products for each loan-to-value. So, at 60% LTV, a lender may offer a 1.99% mortgage with a £1,500 fee and a 2.39% mortgage with a £500 fee, which will better suit borrowers applying for smaller sums. Weighing up the right balance between rate and arrangement fee for the amount that you need could save you hundreds on your loan (see our guide for more details).

Norwich & Peterborough BS: one lender that offers a range of rates and fees on the same loan-to-value.

4. Perks and Prisons

Some lenders are adding perks that reward customers who bank with that institution, which tends to be an advantage for banks over building societies. Santander’s 123 Current Account currently offers 1% cashback on Santander mortgage payments, for example, so a customer paying £750 every month on their mortgage receives £90 back every year.

At the same time, however, there can be the odd shock in store, as Bank of Ireland customers discovered last year when the bank doubled its standard variable rate to the horror of thousands of UK customers.

5. Reputation

There is often a negotiation to be made between the quality of the products on offer and the quality of customer service. Smaller mutuals tend to perform much better in satisfaction ratings while major banks are currently struggling. But smaller lenders are not always able to match the best rates, and it is for customers to decide how much they value service and reputation if it comes at the expense of a higher rate mortgage.

6. Safety

Building societies have proven themselves to be more secure throughout the financial crisis. The collapse of Northern Rock, the bailouts afforded to RBS and Lloyds, and the capital black hole discovered at the Co-operative Bank all underline the difficulties that banks have endured over recent years.

As always, we recommend that you seek professional advice if you are unsure which type of mortgage is right for you and that all of the information provided above is for use as an overview only and should not be the basis for your mortgage decision.

Keith McDonald
Which4U Editor

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