Despite banks taking greater advantage of the government’s Funding for Lending Scheme, mutuals are achieving the lowest rates for customers, with differences of up to 0.5 basis points.
The league table compiled by Moneyfacts showed that the average two-year fixed rate at 75% loan-to-value (LTV) offered by a bank comes with a rate of 2.42%, compared to 1.98% at a building society. An average five-year fixed rate at 95% LTV is offered at a rate of 4.78% by banks, 0.50% higher than the 4.28% available at mutuals.
However, this week global banking giant HSBC bucked this trend and broke the 1% interest barrier with its record-low 0.99% two-year fixed rate for purchase and remortgage borrowers.
But, head of external affairs at the Building Societies Association, Hilary McVitty, pointed out that it was a mutual, Yorkshire Building Society, which had previously held the title for lowest two-year fix on the market at 1.14%.
McVitty explained that the culture and ethos at building societies made operational decision making different to that of banks.
“Because building societies are customer owned and they don’t have to pay dividends they benefit from a financial point of view, allowing them to offer the best rates. That doesn’t mean that margins are unimportant, but what mutuals tend to do is optimise profit rather than maximising it against the demand of shareholders,” McVitty said.
Charlotte Nelson, finance expert at Moneyfacts.co.uk, said borrowers opting for the average two-year fixed rate at 75% LTV from a bank would be £521.28 worse off in terms of repayments in the first year compared to if they applied through a building society.
“Building societies currently dominate the best buy tables and are beating the banks hands-down in the mortgage rate war, which is disappointing considering the amount of government help bigger banks have received. Despite all the money released by the Funding for Lending Scheme, banks are still failing to compete on cost.
“Building societies are making their mark on the mortgage market by offering the lowest deals. Moreover, this dominance is not restricted to lower LTVs – building societies shine at higher LTVs as well,” she added.
“Mutuals are designed to put customers first and aim to provide better deals for them. The gap between the banks and building societies suggests that now is the time for borrowers to look away from the big banks and consider smaller mutuals for a more competitive and cost-effective deal.”