Size isn't everything

In service and rates, mutuals are giving banks a run for their money, says Stephen Pritchard

Surveys of the financial companies frequently suggest that mutual building societies give better long-term value than banks. Building societies feature regularly in industry awards, too.

Surveys of the financial companies frequently suggest that mutual building societies give better long-term value than banks. Building societies feature regularly in industry awards, too.

This year's Moneyfacts awards saw building societies collect eight plaudits, including best fixed-rate mortgage provider (the Britannia); best flexible mortgage provider (Hinkley and Rugby) and best variable rate provider (Scarborough). This suggests that the societies - mutual organisations owned by their members - should be a good bet for home owners.

The Building Societies' Association, the trade body, claims that former building societies that are now banks face costs that are around 35 per cent higher than the mutuals. Those costs come from paying a dividend to their shareholders - money that ultimately comes from the pockets of borrowers and savers.

"The key advantage of a building society over a stockmarket-listed - or Plc - bank is that as a mutual, a building society does not have to pay dividends to shareholders," says a spokeswoman for the association. "The surplus a society makes can be put back into the organisation to benefit its members, through interest rates which are higher for savers and lower for borrowers, and through better services."

But the banks argue that they, too, provide good value; competition in the mortgage market is stiff and it keeps interest rates and other fees low. And, of course, the banks have economies of scale in their favour. Almost all the large lenders are now quoted banks. The demutualisations of the 1980s and 1990s saw many of the big-name building societies, including Abbey National, Alliance and Leicester, Bradford & Bingley, Cheltenham and Gloucester, Halifax and the Woolwich list on the London Stock Exchange or become part of a larger banking group.

Brokers claim that now, only the Nationwide - the largest building society and a strong defender of mutuality - has the market strength to compete head-to-head with the big banks. "The building societies work on the principle of member value, because they don't have to pay shareholders," says Jane Harrison, a director at the mortgage broker London & Country. "But the reality is that the building societies are smaller than banks and their economies of scale are not as good. The best buys come from a variety of lenders." According to Harrison, few clients actively ask for a mortgage from a building society. The interest rate and the features a mortgage offers are more likely to influence the choice of a home buyer.

Building societies do, however, tend to maintain a lower standard variable rate mortgages (SVRs). A survey carried out in the second half of last year by Moneyfacts found that building societies dominated the best value rankings. But only a minority of home owners pay the SVR; it is usually a lender's most expensive rate. It may be that older borrowers with smaller loans - who make up a higher proportion of a building society's customers than a bank's - are more likely to pay the SVR than shop around for a better rate. But for borrowers with larger loans, a low SVR will still not be a good deal.

Where building societies often do score highly is - according to mortgage advisers - in their quality of service. Local building societies try hard to be more personal than the large banks, and local managers often retain more discretion over lending decisions than bank mortgage officers.

Some lenders, such as the Norwich & Peterborough and the Ecology Building Society, have developed niches in self-build and building conversions. Others, such as the Britannia, Yorkshire and Nationwide, have bolstered their range of flexible mortgage and banking features. The Nationwide, in particular, is rated highly by mortgage brokers as good to deal with and strong on customer service, but with the reach and range - when it comes to services - of a bank.

With interest rates on the way up, however, it is the bottom line that matters most to borrowers. London & Country's Jane Harrison cautions borrowers against being swayed by member bonuses: these are very unlikely to offset the cost of a higher mortgage rate.

But there is one possible hidden upside for mutual borrowers. After the wave of demutualisations, most remaining building societies put in place new rules to prevent "carpetbaggers" - mostly investors looking for payouts. New savers now almost always have to agree to give any windfall to charity.

Borrowers may still qualify for a payout, but with few societies actively considering conversion today, it could be a long wait.

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