Banks are better than building societies

New research suggests banks offer more competitive deals than building societies on both savings accounts and mortgages. Szu Ping Chan puts this to the test.

Articles comparing building societies and banks nearly always prove controversial and generate plenty of debate with our readers. I experienced that when I compared the differences between banks and building societies a few months ago.

But I feel it's time to return to this topic as new data from Moneyfacts suggests that banks have turned the tables on their building society counterparts to offer the most competitive overall deals on both savings and mortgages.

Banks vs. building societies

Moneyfacts looked at the average rates offered by banks and building societies on a range of savings and mortgage products. And, while average interest rates on no-notice bank savings accounts of £5,000 were 1.01%, building societies could only offer an average of 0.76%.

In terms of cash ISAs, while banks yielded an average rate of 2.25% on balances of £3,600, building societies could only muster an average of 1.98%.

It's a similar story for mortgages, with the average standard variable rate (SVR) among the banks measuring 4.3%, compared to 5.02% for building societies.

In fact, the only area where building societies provided more value were fees, with fixed rate mortgage fees averaging £985 for banks, and £837 for building societies.

To illustrate what's happening now, here are the market leaders for five different products:

Source: lovemoney.com, eMoneyfacts

The message is clear, and as banks continue to turn up the heat across both savings and mortgages, there isn't a building society to be seen in the table above.

A question of funds

This turnaround can be attributed to a number of factors. One reason is that some banks have, in the past, relied too much on the wholesale markets when it comes to raising cash to lend. Now that those wholesale markets have seized up, some banks have been desperately offering high savings rates to pull in money from high street savers.

Another factor has been the bank rescues. Even though no building society has failed, the societies have still been lumbered with the expense of paying into the Financial Services Compensation Scheme, which Moneyfacts says is forcing them to factor the costs into their pricing.

Not all squeaky clean

However, despite the whiter than white image building societies like to portray, the words, 'pot', 'kettle' and 'black' come to mind when you think of the sticky situations some have found themselves in.

Just last week, Scotland's largest and oldest mutual, Dunfirmline BS caused more tremors in the banking world as it was revealed that the society's dealings in commercial property could cost them around £26m - prompting rumours that it could collapse unless a bidder is found.

Traditionally, building societies have rallied together in times of need, as we saw when Nationwide came to the rescue of Cheshire and Derbyshire building societies last year.

However, playing the hero also has its downsides, and the UK's biggest building society was recently downgraded from 'stable' to 'negative' by ratings agency Standard and Poor's, reflecting what it sees as Nationwide's weakened position.

S&P also said the society would be downgraded again if it were to take over another struggling competitor, prompting them - and others to stay well away from troubled Dunfirmline.

The bigger picture

That said, it's not all bad news for building society savers. Moneyfacts notes that building societies still offer the majority of best buy deals, which occupy 60% of the places in its best buy tables.

In addition, building societies still dominate the consistency tables. So though they may not always be at the top of the best buy tables, consistently good rates have led many to perform well over the long term.

Whatever your view, there is one clear message to be taken from this news. With rates and offers changing almost daily, it's more important than ever to shop around to find the best deals.

Get a better savings or mortgage deal now!