A building society is a member-owned financial institution that developed in the United Kingdom in the 18th and 19th centuries. They are now common in several countries, including Ireland, New Zealand,and Jamaica. Building society bonds are a means of investing in the society for the promise of returns in the form of interest. Most building society bonds are fixed-rate investments, meaning that the rate of return is predictable and guaranteed from the commencement of the investment. There are advantages and disadvantages to using building society bonds that should be carefully considered before investing.
Most building society bonds are available as medium or long-term investments. This means that the investor agrees to leave his or her investment untouched for a specific length of time, often between six months and five years. In some cases, the money is truly untouchable until the bond matures; in other bond structures, it may be withdrawn early at a loss of interest. It is generally advised that an investor make certain that the investment can be spared for the term of the bond, since withdrawing early can severely dent returns.
The fixed rate of interest is an important part of consideration when investing in building society bonds. In a poor economy or recession, having a fixed rate of return may be a blessing, as the rate cannot drop below the agreed percentage. On the other hand, if interest rates skyrocket during the period of investment, returns may be lower than for other investments since the rate will stay at the agreed amount. It may be a good idea to look at market forecasts to determine if bonds are considered a lucrative investment for the near future.
Some building societies do offer bonds with a variable rate. These are often shorter-term investments, lasting between six months and about three years. While there is a greater chance for high returns, there is also a higher risk element involved in variable rate bonds. If the market performs poorly, interest rates may drop significantly, reducing the returns on the investment to a negligible amount.
Many building societies allow the interest payments to be withdrawn on a monthly or annual basis. This means that the investor will receive returns for the bond while it is active, even though the principle investment is not returned until the bond matures. Sometimes, annual withdrawal plans will come with a slightly better rate of return, but can be a problem for those planning to use the interest for day-to-day living expenses. The monthly option may be a better bet for those that plan to add returns to regular monthly income, while the annual option may better suit those saving for a big-ticket item like a car or vacation.
