The Probert Encyclopaedia of Money

BUILDING SOCIETY

A building society is a financial institution that accepts deposits, upon which it pays interest, and makes loans for house purchase or house improvement secured by mortgages. They developed from the Friendly Society movement in the late 17th century and are 'non-profit' making - the reality however is that the directors receive large sums of money in wages and bonuses.

The early building Societies were joint-stock benefit societies for the purpose of raising by periodical subscriptions a fund to assist members in obtaining small portions of landed property and houses, which were mortgaged to the society until the amount of the shares drawn on was fully repaid with interest. These societies were divided into two sections: the Proprietary and the Mutual Societies. The former class took money on deposit, paying a somewhat higher rate of interest than could generally be had on money available at call, and gave loans for building purposes, or the like, repayable by instalments. The profit of the company lay in the difference between the rate charged to borrowers and the rate paid to depositors.

The Mutual Societies were of two chief kinds, either limited to a certain term of years and confined to a certain number of members, or permanent, and not confined to any definite number of members, but ready to receive new members as long as the society existed. A favourite form of terminating society allotted its capital among the members, according to the number of shares they held, by ballot. The subscriptions were paid weekly or monthly, and on securing an 'appropriation' the member repaid this sum very much as he would have paid his rent, over a term of years, at the end of which the house or land became his own. He also maintained his small subscription, and at the winding-up of the society was entitled to a share of the profits.

Terminable societies were giving place to the permanent kind by 1910. These, by the constant admission of new members, have a constant supply of funds at their disposal, and are thus able to supply the demands of all the borrowers; while the security offered to investors induces many people to enter the society merely with the view of having a convenient means of depositing their savings, and not with the intention of acquiring any real property for themselves.

Building societies are regulated by the Building Society Act (1986). The societies accept deposits into a variety of accounts, which offer different interest rates and different withdrawal terms, or into 'shares', which often require longer notice of withdrawal. Interest on all building- society accounts is paid net of income tax, the society paying the tax direct to the Inland Revenue. The societies attract both large and small savers, with average holdings being about 5000 pounds.

Loans made to persons wishing to purchase property are usually repaid by regular monthly instalments of capital and interest over a number of years. Another method, which is growing in popularity, is an endowment mortgage in which the capital remains unpaid until the maturity of an assurance policy taken out on the borrower's life; in these arrangements only the interest and the premiums on the assurance policy are paid during the period of the loan. Since the 1986 Act, building societies have been able to widen the range of services they offer; this has enabled them to compete with the high-street banks in many areas. They offer cheque accounts, which pay interest on all credit balances, cash cards, credit cards, loans, money transmission, foreign exchange, personal financial planning services (shares, insurance, pensions, etc.), estate agency, and valuation and conveyancing services.

The distinction between banks and building societies is fast disappearing, indeed many building societies have obtained the sanction of their members to become public limited companies. These changes have led to the merger of many building societies to provide a national network that can compete with the Big Four banks. Competition is well illustrated in the close relationship of interest rates between banks and building societies as they both compete for the market's funds. Moreover, the competition provided by the building societies has forced the banks into offering free banking services, paying interest on current accounts, and Saturday opening.
Research Building Society