Mutuals fail the value test

By RICHARD DYSON
Updated: 02:26 EST, 8 November 2005

MOST savers and borrowers would be better off choosing a big bank rather than a small building society, according to research by Financial Mail.

With smaller societies under pressure to merge to improve the deals they offer, we have analysed a variety of savings and mortgage products.

There are 63 building societies. Our survey was confined to the smallest 43, ranging from the Lambeth with 180,000 members to the Catholic with 3,000.

In theory, societies should offer better deals than banks because they do not have to pay a slice of their profits to shareholders. Instead, the money can be ploughed back into better deals.

With big societies such as Portman, Nationwide, Britannia, and Yorkshire, this mutual advantage seems to work.

Nationwide, the biggest building society, continually compares its deals - from mortgages to savings accounts and personal loans --with dozens of rivals. It reckons it pours an extra £1bn a year into better deals for members.

But with smaller societies, the benefits of mutuality are lost because even efficiently run ones do not have the scale to compete with the huge banks.

Our research looked at small societies' average mortgage and savings rates for popular deals and compared them with average rates offered by the biggest High Street providers. The analysis was based on data compiled by Moneyfacts for September.

With mortgages, small societies lost hands down. On standard variable rates, two-thirds of small societies charged more than the average bank. Though some, such as Stafford Railway and Harpenden, had low variable rates, others, such as Lambeth and Dudley, had the most expensive.

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With two-year fixed rate or discounted rate mortgages, small societies fared even worse. Only one in five offered a two-year fixed rate, even though it has been the most popular mortgage deal in recent years.

Where two-year fixes were offered, they were on average almost half a percentage point higher than the rates offered by banks.

For a borrower with a £70,000 repayment loan, that would make a difference of an extra £503 over the two years.

Two-year discounted deals, again highly popular, were offered by only 15 out of the 43 societies and the average rates were again higher than those charged by big banks.

Small societies fared better on savings. In particular, we looked at Isa rates payable on small deposits where savers wanted ready access.

The average small society paid 4.32% compared with an average rate of 4.15% from the biggest 15 providers. But while 14 of the big 15 paid interest on deposits of £10 or less, the small societies insisted on minimum deposits of anything up to £3,000.

Most bosses of small societies say they would consider merging if they felt they had reached the point where the deals they offered were uncompetitive.

Nigel Fleming, below, boss of Newbury Building Society with 48,000 members, says: 'If we felt we did not have a successful future, we'd do something about it. Competition is tough, but when someone says we can't survive as an independent mutual, my response is to try harder.'

Bob Jackson, boss of the Cambridge Building Society with 130,000 members, says: 'Times are tough, but our strategy is to be different, to win on service. We have branches in places where the banks have given up.'