Shop around, be a rate tart

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The Independent Online

The Bank of England's shock decision last week to cut interest rates to 5 per cent triggered a flurry of movement among a number of banks and building societies. Some cut mortgage and savings rates immediately while others delayed, which highlights the importance of shopping around for the best deals. Customers who rely on the same bank for their mortgage, credit cards, loans and current account won't get the most competitive rates.

But becoming a "rate tart", as customers who switch financial products are often known, can be hard work. No sooner have you switched to a better rate of interest on your credit card, for example, than the provider increases the rate or a rival offers a better deal. There are dangers in moving too frequently – you need to get the balance right.

Below is our guide to being a rate tart. If you haven't become one yet, it might be time you did.

 

Remortgaging accounts for 35 per cent of home- loan deals, up from 15 per cent in 1997, according to the Council of Mortgage Lenders. Some lenders, such as Standard Life and Stroud & Swindon, are so concerned about the frequency at which borrowers are remortgaging that they are making it hard for them to do so.

But most home owners on unattractive standard variable rates (SVRs) should save money by remortgaging. David Hollingworth, at mortgage broker London & Country, says a borrower with a £100,000 repayment mortgage on an SVR of 6.25 per cent, could save £9,104 over 10 years if they switched to a discount rate of 5.09 per cent. Watch the charges so it doesn't end up costing you more than the benefits you accrue. If you face big redemption penalties for switching, it might not be worth it. London & Country (0800 373300) will work out the costs for you for free.

Most borrowers should consider remortgaging every couple of years. Mr Hollingworth recommends Kent Reliance's three-year discount of 1.25 per cent, giving a payable rate of 5.23 per cent, with no penalties, a £25 arrangement fee, refunded valuation and free basic legal fees. For more certainty, Portman has a three-year fix of 5.49 per cent until 1 August 2004, with free valuation and basic legal work. There is a £300 completion fee and you can only borrow up to 75 per cent loan to value.

Consider redemption penalties on the new loan before switching; don't get an extended lock-in. Some low offers come with arrangement fees and legal charges, which could add several hundred pounds.

If you use a broker, you may have to pay for the service, which could mean bigger savings in the long run. "To ensure absolute impartiality you may want to choose a broker that charges a fee rather than commission," says Mark Harris, director at Savills Private Finance, a mortgage broker.

 

We are used to shopping around for plastic. Rate surfing – frequently switching to a more competitive deal -- is common practice. Low introductory rates, starting at 0 per cent APR, tend to last for six months. After that, consider switching again.

Repeated applications for cards can be bad for your credit rating, however. Each of us has a file held by the credit- reference agencies Equifax and Experian. Every time we apply for a new card, the provider runs a credit check on us before deciding whether our application will be successful. If you apply for several cards, there are repeated checks recorded on your file, which harms your rating. It sounds warning bells to lenders, which see you as more of a risk.

But if you change your credit card every six months or so, rather than monthly, it shouldn't be a problem.

 

The "big four" high-street banks control nearly three-quarters of the current account market but, since the arrival of the internet bank, there is no excuse for accepting negligible interest on balances, sky-high overdraft rates and charges for unauthorised overdrafts.

Switching accounts is getting easier, with most banks doing the work for you. But changing too many times will make it harder to get other credit: it tends to be easier if you have been with your bank for a while. Pick an account which pays above-average interest and has low overdraft charges (if you need this facility), and then stick with it.

The most competitive current accounts are on the internet: Cahoot pays 6.2 per cent interest on balances of £1 while IF pays 4.5 per cent. If you prefer a branch-based account, Halifax pays 3.25 per cent – one of the best deals around.

Authorised overdraft rates can cost as much as 19.5 per cent (the Clydesdale and Co-operative banks), while unauthorised rates are higher still. But Abbey National and Nationwide charge 9.9 per cent on authorised overdrafts, while Alliance & Leicester offers free overdrafts for six months.

Watch out for penalty charges for exceeding the authorised overdraft rate. And remember you can still switch accounts, even if you are overdrawn.

 

Proposed changes to the Consumer Credit Act should make it easier for borrowers to switch between loans. This will be useful as high-street banks impose high charges: NatWest levies 19.9 per cent interest on loans between £1,000 and £2,990, while Lloyds TSB charges 19.8 per cent on the same amount. However, Cahoot charges 8 per cent and Northern Rock 8.5 per cent. Many lenders charge redemption penalties if you switch to another provider, so check before you sign up. Cahoot's personal loan is fully flexible: you have to pay a minimum amount each month, but you can exceed that or take payment holidays.

Looking for credit card or current account deals? Search here

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