Don't let the banks bleed you dry in their bid for profits
From mortgages to current accounts, consumers face fees ratcheted ever higher. So how can you stop yourself falling prey? Julian Knight investigates
Sunday 07 June 2009
Britain's banks and building societies are after your money like never before. But instead of offering bumper savings rates to attract new customer cash, our financial giants are choosing other, more underhand, routes to repairing their balance sheets, which have been laid waste by the credit crunch.
Slowly but surely, borrowers, savers and current-account customers alike have been squeezed, with the loyalest losing out the most. Mortgage rates have been kept high despite easing in the money markets, interest rates for the vast majority of current account and savings customers are zero or barely above, while those with a credit card or personal loan have faced the twin setbacks of higher rates and extra fees being imposed for everyday transactions.
At a time when banks and building societies are scrambling to expand their profit margins on all manner of products, it's crucial to be aware not only of the tricks they play to keep as much of your cash as possible, but also how to sift through the dross and find the small number of golden-nugget deals still out there.
Despite the Bank of England slashing rates to a historically low 0.5 per cent, a substantial proportion of mortgage borrowers have seen little benefit. "The problem is two-fold," says Ray Boulger from broker John Charcol. "First, the rates that lenders have to pay on the money markets are well above the Bank base rate. Secondly, lending criteria have been tightened in reaction to growing bad debts and falling property prices. Now, only those with a 25 or 30 per cent deposit can expect to get anywhere near the best rates."
But no doubt there is also profiteering going on. "Money-market rates have come down of late and we have not seen a subsequent fall in mortgage rates. Lenders are holding a lot back to prop up their balance sheets and it's the most loyal customers, those on standard variable rates and those who can't remortgage, because they don't have a good credit rating, or the property has fallen substantially in value, who are paying the cost," said Louise Cuming from price comparison service Moneysupermarket.
What to do?
"The trouble is there is little competition out there, with only six big lenders really active at the moment," Mr Boulger says. However, deals can be found provided the borrower can jump through the right hoops. "Make sure you have a clean credit record, as large a deposit as possible and don't try to borrow a very high income multiple. Stick to three or four times salary as a rule of thumb."
Mr Boulger adds that with the next move in UK interest rates likely to be up, it may be a good time for those coming to the end of an existing deal to fix for the long term: "Five-year or seven-year fixed-rate mortgage deals may be a good bet as it gives you certainty and also could mean that you protect yourself from any sharp rise in Bank rates over the next few years."
Interestingly, your local building society may not be the best place to turn for a home loan. "Our research shows that the building societies, instead of rewarding their loyal customers, are actually penalising them through charging the highest standard variable rates," Ms Cuming said.
But, when choosing a deal, be wary of the potential hidden danger of high fees: "In these troubled times, it's easy just to look at the headline interest rate, but lenders have been squeezing consumers through arrangement and other upfront fees. There are growing cases of lenders charging not a flat fee but a percentage of the loan as an arrangement fee. If you're borrowing £200,000 and the arrangement fee is 2 per cent, that's a fee of £4,000."
It has been estimated that you are more likely to get divorced than change your current-account provider, and this consumer apathy has given banks and building societies a means by which to turn the screw.
Huge names in the current-account banking sector, such as HSBC, First Direct and Barclays, have stopped paying interest on current accounts. "They weren't paying much interest to start with – sometimes as low as 0.1 per cent – but over millions of current-account customers that means the banks can save a lot of cash and people don't seem to value the interest as much as they ought," says Michelle Slade of Moneyfacts, the financial information service.
Again, the building societies have followed suit. "Both the Norwich and Peterborough and Nationwide have stopped paying credit interest, proving again that building societies are adopting a similar approach to consumers as the big banks," Ms Slade said.
However, Spanish banking giant Santander has been trying to grow market share using credit interest as a carrot. From Monday, Santander-owned Abbey and Alliance & Leicester will start paying 6 per cent on credit balances.
What to do?
Ms Slade says that although the interest rate earned is important, it isn't everything. "If you regularly go overdrawn, then look at an account with low authorised overdraft fees, if you're in positive balance throughout the month, then go for interest rates. Look at which account works for you but beware of packaged current accounts which offer a high interest rate as long as you pay a monthly fee, as they may not be worth it."
Until the final quarter of last year, savers did rather well out of the banks' travails. There was a bidding war for savers' cash, with upwards of 7 per cent interest on offer. Then a succession of Bank of England rate cuts pulled the rug from under savers, with average rates plunging to just 0.69 per cent for £5,000 in an easy-access account.
"If you haven't switched your savings recently it's likely you're in an account which is paying virtually no interest," warns Ms Slade.
What to do?
The main message seems to be to shop around for the best buy, but with some hefty provisos. "Be aware that there are a lot of introductory-rate accounts out there which seem to be offering a good deal, but the rate falls away at a later date. If you don't mind tying up your money for a period then a fixed-rate account may be the best bet," Ms Slade says.
Credit cards and personal loans
Millions of credit-card borrowers have seen fees pile up just for using their plastic. Providers have been upping fees on cash withdrawals, increasing the number of transactions deemed to be cash (such as charity donations and betting) and charging more for usage abroad.
"Charges have increased slowly but surely for many borrowers without them possibly even noticing it," says Ms Slade. "One of the biggest wheezes is for the provider to arrange the order of repayments so they clear the cheapest borrowing first and the highest, like cash withdrawals, last, maximising the total interest paid."
As for personal loans, the cost of these has risen recently due to fears over mounting bad consumer debts. Even the ban on the sale of payment protection insurance with personal loans may have made matters worse. Ms Slade says: "PPI used to support the low loan rate on offer; now it's gone, so are the low rates."
What to do?
Crucial to getting a good deal is credit rating. The Typical APR quoted in most adverts only has to be available to two-thirds of customers. Many pay more or are shunted on to higher-charging cards designed for those with a less-than-perfect credit score. "Basic principles are: keep up repayments, have a couple of active credit agreements, no County Court Judgments and a stable address history," said Owen Roberts, from Call Credit.
But if you have been in trouble in the past it doesn't automatically condemn you to paying a higher rate. "Credit files go back six years – a problem a year or so old is not as detrimental as something in the past few months," he says.
There are still some low rates on credit cards. Tesco offers 12 months at 0 per cent on new purchases. For big-ticket items, taking a further advance on a mortgage may now be a smarter, cheaper play than a personal loan.
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