Building societies remain essential to savvy savers

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By Rachel Jones
Know Your Money Editor

Building societies in the UK are concerned about the recent cut in many of their credit ratings by ratings agency Moody's. Several high street institutions, including Yorkshire and Chelsea building societies, have been downgraded as regards to their financial security. Indeed, the rating agency's belief that house prices are set to remain unstable over the coming months led to its decision to lower many firms' scores. Many mutuals may have to hand cash back to the Bank of England under the Special Liquidity Scheme, which was introduced to allow building societies to strengthen their balance sheets by swapping risky assets for Treasury bills, the Guardian reports.

However, despite the gloomy predictions of Moody's over the future success of building societies, new research reveals that many members of the public still have confidence that stashing cash at such financial services providers is the best way to go.

Are building societies king of the high street?

The Building Societies Association (BSA) recently revealed that February represented a record month for the value of deposits placed into building societies. Its latest report showed that almost £1,600 million was stashed away into such institutions, an increase from the £1,353 million stored away in February 2008.

Commenting on the figures, head of savings policy at BSA Brian Morris says: "The record February net receipt of £1.6 billion shows that building societies' attractive savings products are helping them to compete for deposits.

"Despite the Bank rate being so low, people are still keen to save, probably in response to the uncertain economic outlook and reduced job security."

Furthermore, Moneyfacts recently reported that building societies are proving to be consistent providers of attractive savings returns for individuals who may be currently being punished by the 0.5 per cent interest rate. The Bath, Principality and Teachers building societies topped the poll of generous but consistent organisations. Building societies ranked highly for their returns on cash individual savings accounts, internet savings accounts and no-notice savings accounts. They also proved to be well-versed in rewarding those savers with notice savings accounts, the survey stated.

So while Moody's may be less inclined to take a chance on the financial stability of building societies, analyst at Moneyfacts.co.uk Michelle Slade said savers who do not have time to switch accounts to secure the best deals are instead looking to those providers which remain a consistent force through the recession. And those providers are building societies.

"Taking more than three-quarters of the top spots, building societies once again increase their dominance in the Moneyfacts consistency survey. Savers looking to make the most of their money shouldn't just look to their bank for their savings needs," she states.

"With [the] base rate at an all time low, it is inevitable that savers are seeing lower returns than this time last year, but by putting in a small amount of work to find the best home for your money, you could avoid being hit so harshly," Ms Slade advises.

So why is Moody's reducing their rating?

Nine building societies, including Nationwide, fell victim to the credit rating chop. Moody's claims in light of a 40 per cent drop in property prices since the peak of the housing markets, building societies may find it increasingly difficult to weather the economic storm.

Speaking to the Financial Times, Marjan Riggi of Moody's said that when the organisation first made its predictions it was against a backdrop of a 25 per cent property price plummet. But with house prices still on a leash, it had to rethink its original credit ratings and act accordingly. Many commentators have said that the new ratings are extreme, pessimistic and do not reflect reality.

Indeed, findings from BSA could back up claims that building societies are protecting themselves as much as possible. During February, gross mortgage lending by such financial services providers dropped to £1,214 million, from £3,861 million in the same month in 2008.

Head of mortgage policy at BSA Paul Broadhead concludes: "The low levels of lending by building societies come as no surprise in view of the depressed levels of activity in the housing market."

Consistent returns and a helping hand

Not only are building societies proving to be consistent but they are also giving Britons a helping hand when it comes to debt management, the BSA continues. The organisation has teamed up with the Money Advice Trust to produce a booklet advising people what to do if they cannot afford their mortgage repayments. Mr Broadhead stated that individuals should contact their building society with confidence that despite common myths, they will help people through the recession and not clamp down on their finances. Indeed, contacting mortgage lenders as soon as possible can help alleviate some of the financial burden that homeowners may be under.

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