Bailed-out banks offer lowest rates

Repaying their debt to the Treasury is the main focus, not customers. Julian Knight investigates

The big state-backed banks are systematically paying lower rates to savers while charging more to borrowers, according to exclusive research conducted for The Independent on Sunday.

"Part-nationalised banks are essentially in debt to the Government, so their focus remains solely on paying back the debt rather than launching and promoting market-leading products. They are covering their backs by offering customers poor mortgage and credit card rates to minimise the risk factor," says Louise Holmes from financial comparison site Moneyfacts.co.uk.

Independent price comparison site Moneyfacts said that across a whole batch of mortgages, savings accounts and credit cards the big state-backed banks – Lloyds, RBS, Halifax and Northern Rock – offer worse deals on average than building societies and even other large banks. Take two-year fixed rate mortgages: the average rate from state-backed banks is 4.81 per cent, compared with an average of 4.64 per cent of other retail banks and 4.68 per cent for building societies.

One of the highest fixed mortgage rates on the market is 7.69 per cent from Cheltenham & Gloucester, a subsidiary of Lloyds Banking Group, for a five-year fix with no fee available up to 90 per cent loan to value (LTV). This rate has been shown up by the likes of Britannia and Co-operative Bank launching new deals this week into the 90 per cent mortgage market, including a fee-free five-year fix at 6.39 per cent.

"It would be welcome if their rates were sharper. Halifax, for example, is not as competitive as Britain's biggest mortgage brand could or should be," says David Hollingworth from broker London & Country.

There are several reasons state-backed banks have taken a different strategy, particularly with mortgages. Firstly, these banks have to use a percentage of their resources to manage the repayment of government borrowing. Moreover, many of these banks are trying to repair their balance sheets and deal with existing loans on their books which are proving to be far more expensive in the current marketplace than they expected. There is also a strong suspicion voiced privately by several consumer groups and debt charities that the state-backed banks are squeezing extra profit margin out of savers and borrowers to satisfy the need of politicians to see a quick return on the money used to bail them out. In effect, ordinary customers who are also taxpayers are paying a premium in order to ensure a speedy return of the Exchequer's cash.

However, state-backed banks are still some of the biggest supporters of first-time buyer mortgages and some of the highest rates are up to 90 per cent LTV. "Our mortgage range features competitive deals available across different product terms and LTV levels. It is important to consider all aspects of the product when comparing the deals available," says a spokesperson for Lloyds Banking Group.

State-backed banks face the challenge of balancing more lending of this nature and avoiding being too competitive which would have building societies arguing that state-backed banks are pushing pricing down. Northern Rock which is fully owned by the state, has a commitment not to be in the best-buy tables, but many experts argue more could be done.

"If we are to have a more functional market we need state-backed banks to be supporting that end of the market. They have maintained a presence, but Northern Rock only offers maximum LTV at 85 per cent," says Mr Hollingworth.

Customers who borrow from state-backed banks on credit cards are facing higher costs for purchases too, with an average annual percentage rate (APR) of 18.30 per cent, compared with a more competitive average of 17.50 per cent from other banks and 17.15 per cent from building societies.

"Lloyds has one of the most expensive charging structures for unauthorised overdrafts. If you are overdrawn without arrangement you pay a monthly fee of £15 plus a daily fee ranging from £6 to £20 per day depending on the amount you are overdrawn," says Andrew Hagger of Moneynet.co.uk.

Average savings rates paint a similarly depressing picture, with the average variable notice account from nationalised banks standing at a paltry 0.81 per cent, while retail banks offer an average of 1.18 per cent and building societies are just shy of this offering 1.14 per cent. Similarly, the average one-year bond from state-backed banks is 2.23 per cent, compared with 2.48 per cent from other retail banks and building societies' impressive 2.88 per cent.

Some of the worst offenders include the variable no notice account from Ulster Bank (RBS) paying 0.01 per cent, and the one-year fixed rate bond from HBOS paying 1.50 per cent. Consumers who shop around for the best deals could secure a rate of 3.25 per cent from United National Bank's one-year fixed deposit account.

There are, however, some exceptions. Halifax is highly competitive in the savings market with a 2.80 per cent Web Saver extra account, which is an instant access best buy. It also offers the top rate for both a two-year fixed ISA at 3.50 per cent and a four-year fixed ISA at 4.25 per cent.

"Consumers shouldn't take the easy option and remain loyal to their existing bank. It's a strategy that could cost them dearly in terms of higher borrowing costs or lower savings rates," says Mr Hagger. "It's very rare that your bank will reward you for your loyalty, so don't think twice about taking your custom elsewhere."

Additional reporting by Chiara Cavaglieri