We are still waiting for the lending squeeze to relax its grip so that those of us with average salaries, average credit reports and average deposits can borrow money for property again. We could be waiting a long time, but in the meantime, lenders are coming up with ways to bargain with us over our financial needs.
The latest trend is the tie-in mortgage, where providers will consider you for a loan if you are an existing current- or savings-account customer or are willing to become one.
Last week, the Halifax joined the swelling ranks of those offering tie-ins with a fixed, two-year deal at 2.99 per cent interest, its lowest rate ever, available only to those who already hold a current account with the branch, or are prepared to switch to it. The move follows the launch of HSBC's two-year discounted mortgage for members of its Premier banking service, also at 2.99 per cent. And Royal Bank of Scotland will offer its packaged current account customers up to 30 per cent off mortgage fees on its new, fixed-rate range.
At first, it seems a good way to get round the credit crunch, but having so much of your day-to-day money held by just one organisation has a whole host of implications, while the conditions on the lending offers are limited to say the least. The Halifax rate is only available for those with a 40 per cent deposit or higher and the fee is a huge 2.5 per cent. Meanwhile, to be a Premier customer at HSBC, and so qualify for its special mortgage deal, you must have at least £50,000 in savings with the bank or a minimum salary of £75,000 and, curiously, a mortgage worth at least £250,000.
"This move towards tie-ins simply underlines the fact that lenders are looking for gold-plated customers," says Louise Cuming, the head of mortgages at price comparison site Money-supermarket.com. "If they can tie a mortgage to a current account, they can cherry-pick the customers they want. It also makes it difficult for a customer to compare the best rates and deals for their needs."
Even if you do fit the bill, these are not necessarily the cheapest deals out there. "They may have a market-leading mortgage rate but the catch is with the other products," notes Melanie Bien, a director of broker Savills Private Finance. "And it is hit and miss whether these will be as attractively priced. In most cases, you would have got a better deal if you had shopped around."
The Halifax current account pays only 0.1 per cent on credit balances, rising to 2.5 per cent for its high-interest account, which doesn't compare favourably with the market-leading 6.5 per cent offered by Alliance & Leicester's free-to- use Premier Direct current account. This means that if you consistently have £500 in your current account, you'd get £32.50 interest a year from A&L but as little as 50p from the Halifax.
Worse still, HSBC offers no interest at all on its current accounts, after recently removing the tiny 0.1 per cent it had been paying on the grounds this would make it easier for customers to calculate their tax return. (It also happens to save the bank an estimated £7m a year.)
A considerably cheaper mortgage rate would easily offset the effect of losing a high rate on the current account. But tie-ins are unlikely to offer you that either. The headline 2.99 per cent rate offered by the Halifax on its fixed, two-year deal is one of the best out there right now, but if you aren't prepared to pay that 2.5 per cent fee (equating to a staggering £3,750 on a £150,000 loan), the rate rises to 3.99 per cent for a £995 fee, or 4.19 per cent for a £495 fee. Alliance & Leicester is offering a two-year, fixed deal for 3.19 per cent at a 2 per cent fee (saving you £750 on the same loan) but is still at a better rate than the 3.99 per cent offer with the lower fee.
Likewise, HSBC's two-year mortgage, set at a discount to its standard variable rate, seems an unbeatable deal at 2.99 per cent for a £999 fee on a maximum loan-to-value of 60 per cent. But again, A&L can do a two-year tracker mortgage at 3.29 per cent with a 2 per cent fee, and you don't need a salary of £75,000 or £50,000 in the bank to do it.
Nor do these products compare well with offset mortgages, which won't demand a tie-in but will offer big discounts on your interest rate. "With offset you are not compelled to opt for other products linked to the mortgage, but it is in your interests to go for them to make the mortgage element cheaper," says Ms Bien. "This is a real benefit to the customer that is not there with tie-in accounts."
Also bear in mind that signing up for one of these deals will mean you have a current or savings account, as well as debts, with one financial company. The money you have in savings with a bank is protected up to £50,000 by the Financial Services Compensation Scheme if that institution goes bust. But if you also owe the same bank money, in this case your mortgage, those savings will be used to pay off your debt first. The chances are that if a bank holding both your mortgage and your savings goes under, you won't see any of your money again.
But if you do go for a tie-in mortgage, it's not just from low interest on savings and high interest on debts that banks will make money.
"As far as they are concerned, the driving force for tie-ins is usually to get hold of your current account because it gives them so much information about your money and spending habits," warns Ms Cuming. "If the bank knows when, how much and to whom you pay your home insurance, for example, they can easily try to sell you products and get more of your money. There is also the question of selling your information on to third parties."
Current accounts also have one of the highest rates of customer loyalty. Lenders are banking on the chances that once your account is with them, you won't leave.
"A year ago, tie-ins were looked on as the unacceptable face of mortgage lending," says Francis Ghiloni at mortgage comparison site mform.co.uk. "But nowadays, almost anything goes and borrowers have to jump through more and more hoops."
It isn't as if this type of mortgage will do anything to alleviate the wider lending crisis, either. "It adds to the development of two distinct groups of borrowers: the cream of the crop with perfect credit scores and plenty of savings, and the rest of us," adds Ms Cuming. "The Government wants to free up money for lending, but all the banks are doing is lending to the upper echelons of society. If we are to have any hope of getting the market moving, lenders must do business with first-time buyers who need to borrow 95 per cent of the value of a property."Reuse content