Finance - Building Societies

Building Societies

Building Societies have traditionally been owned by investors themselves. They began in the UK in the late 1700s with the sole purpose of pooling money in order to help members build their own homes. Once everyone was housed, a society would close.

Modern building societies are in the business of loaning out funds for the purchase of property. As they wish to bring in new funds to loan out again, they are able to offer higher interest rates to investors.

Each society offers its own range of accounts, which might fall into one of two categories. First of all, there are notice accounts, with notice periods such as 7, 30 or 90 days. Immediate access normally attracts a penalty equal to the loss of interest earned. Income bonds form another type of account available to investors. In this case, some building societies offer two to three-year income bonds. This guarantees the building society with funds over a longer period and can reward the investor with a higher return.

Because building societies have no outside shareholders and thus do not need to pay out dividends, their running costs often are less than those of traditional banks. This can translate into higher interest on savings (and cheaper mortgages).

Each member of a building society - both investors and borrowers - is eligible to participate in general meetings and has a vote, the weight of which does not depend on the amount invested or borrowed, nor on the number of accounts held.

In the UK the first 2,000 pounds of a building society investment is guaranteed 100 percent under the Financial Services Compensation Scheme, while the next 33,000 pounds is guaranteed at 90 percent. However, according the UK's Building Society Association, no one has lost money with a building society since 1945.