How to beat the banking giants

Published 01st Nov 2009

State-backed lenders pare back deals as Europe’s net tightens


Millions of customers are likely to get a raw deal from Britain’s state-backed banks for years to come as the European Commission seeks to limit their competitiveness.

Lloyds Banking Group, which was formed at the start of the year from the merger of Lloyds TSB and Halifax Bank of Scotland after the government waived competition rules, has been ordered to reduce its share of the current account market from about 30% to 25% as the price of receiving state aid.

Analysts said Lloyds, which is 43.5%-owned by the taxpayer, already appeared to be making its deals relatively unattractive in an effort to lose business naturally. Halifax customers are up in arms about forthcoming current account changes, under which fees on authorised overdrafts could soar by as much as 2,000%. It is also scrapping interest on current accounts for those in credit.

Northern Rock, which is entirely owned by the taxpayer, was told by the commission last week that it must not appear in the top three of the mortgage best-buy tables until the end of 2011. It must also keep its savings balances below £20 billion and will have to reduce the amount it lends from £9 billion in 2010 to £8 billion in 2011.

The requirements, which came as part of a deal to allow Northern Rock to be split into a “good” and a “bad” bank, do not come into force until next year, however. Until then, the lender is offering some of the best deals on the market and borrowers are being urged to take advantage.

Last week the bank made the deals available through brokers only, so they did not appear on best-buy tables.

Royal Bank of Scotland, which is 70%-owned by the taxpayer, also scaled back its mortgage lending last week. The rate on its five-year fixed deal for first-time buyers, for example, increased by 0.4 percentage points to 6.39%.

Philip Hammond, shadow chief secretary to the Treasury, said: “Banks that have been bailed out by the taxpayer must treat customers fairly. While we appreciate that there is a need for them to rebuild their balance sheets through profits and that pressure from Europe means they should not have a competitive advantage, they should not be charging rates that are out of line with the rest of the market.”

Vince Cable, Treasury spokesman for the Liberal Democrats, said: “Banks that have benefited from the taxpayers seem more preoccupied with paying their top staff highly rather than treating their customers fairly.”

Here we suggest how you can beat the squeeze on competition:

Best for mortgages: Northern Rock — for now

Borrowers are being urged to snap up deals from Northern Rock before the commission’s requirements come into force at the start of next year.

The lender has the best tracker deal but it is available only through L&C Mortgages. It charges 1.99 percentage points over Bank rate, or 2.49%, and has a fee of £1,995, so is better for those looking for a larger mortgage. A 30% deposit is required. If you apply direct through Northern Rock, the rate is 2.19 points over Bank rate, or 2.69%, although the fee is lower at £595.

David Hollingworth of L&C said: “Northern Rock offers some of the best deals in the market. It is likely these will become less competitive as pressure increases for it not to be a market leader. I’d urge borrowers to snap up the deals before they disappear.”

The best two-year fix if you have a 30% deposit is also from Northern Rock, with a rate of 3.65% and a £595 fee — again available only via brokers.

Abbey has a lower rate of 3.59% but the fee is £995 and borrowers must have an Abbey current account.

Northern Rock also offers a top five-year fix costing 4.99%, with a £595 fee, for those buying with a 30% deposit. HSBC has a lower rate of 4.95% but the fee is £999 and the minimum deposit is 40%.

Best for savings: National Savings & Investments

The government’s savings arm stormed into the best-buy tables last week but advisers said it was unlikely to remain there for long.

NS&I maintains an unofficial market share of about 8% so it does not distort the sector, and must withdraw its deals if it pulls in too much savers’ cash.

Its one-year guaranteed growth bond offers the best rate over 12 months at 3.95% — an increase of 2.95 points on the previous issue. The minimum balance is £500 and withdrawals are subject to a penalty of 90 days’ interest. The next best one-year deal available, at 3.75%, is provided by State Bank of India.

NS&I’s two-year growth bond pays 4.25%, just less than the best two-year fix from the AA, part of Birmingham Midshires, in turn, a subsidiary of the bailed-out bank HBOS. It pays 4.35% on a minimum balance of £500. However, analysts said that there were question marks over how long HBOS would be able to offer attractive rates.

If you want easy access, it is worth looking beyond the established players. Citibank, for example, offers a rate of 3.25%, although this includes a 2.25-point bonus for 12 months.

The best easy-access rate without a bonus comes from West Bromwich building society. It pays 2.8% on a minimum balance of £1,000.

Best for current accounts: Cahoot

Santander, which owns Abbey, Alliance & Leicester and Bradford & Bingley, is hoping to steal market share from the big banks. Its online bank, Cahoot, offers one of the best rates on current accounts, paying 1% on up to £250,000. It also has a relatively low authorised overdraft rate of 11.74%.

Consumers could also look at Norwich & Peterborough, which charges 11.8% for prearranged overdrafts.

Source: ' Sunday Times '

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