Page 1: Introduction
Building societies date back to the late eighteenth century. The first known building society was set up in 1775. This was to enable people to pool savings together and to build their own homes. However, once they had built their houses, this particular society closed.
In the 1840s, societies began to accept savings from members who were not necessarily potential home owners. It was then that the permanent societies that we have today were formed. In 1869, the Building Societies Association was set up to provide national representation for the industry.
The Building Societies Association (BSA) is the trade association for all the UK”s building societies. It now has 59 members and together they have assets worth over £350 billion.
A building society is a distinctive business form governed by the Building Societies Act 1986. Building societies are mutual organisations. This means that its borrowers and savers have membership and are joint owners of the society. The building society receives deposits from savers and then uses the funds to make loans for its members for house purchase.
Until the 1980s, only building societies, generally, could offer loans for houses. From the early 1980s, banks quickly became competitors.
Following the Building Societies Act 1986, societies were also free to 'demutualise' to become banks. The members of each building society had to agree to this change. Several building societies offered windfall payments to members to persuade them and some big names became banks, for example, Abbey National, Halifax and Alliance & Leicester.
Buying a house is usually the most costly purchase an individual ever makes. People buy a house or flat to get a permanent home and a stake in the property market. Very few first-time buyers have enough cash to buy a property, so they take a long-term secured loan called a mortgage.
A mortgage has two elements the amount of the original loan (the capital) and the interest which is charged on the loan. A repayment mortgage means that each month's payment pays off the interest and a small part of the loan. By the end of the loan period, the borrower will have paid off the entire loan.
When an owner buys a house he or she has a valuable asset. If the value of the house increases, this can give them a profit if they choose to sell the house. Loans typically last for 25 years and are secured on the property. This means that if buyers do not keep up the regular monthly payments, the bank or building society could take the property back to sell it to pay off the debt.
There are two main providers of mortgages:
- banks like Lloyds TSB, the Halifax or Bradford & Bingley. These are public limited companies (plcs) and are owned by their shareholders.
- building societies like Nationwide and Britannia.
This case study outlines different types of business organisations and their purpose. It highlights the similarities and differences between other types of business and building societies.