Money Insider: Virgin Money will be big – but not overnight

Confirmation that Sir Richard Branson's Virgin Money has finally bought Northern Rock understandably caused great excitement when the announcement was made last week. This was the news many consumers and industry commentators had been waiting for: at last a credible challenger to the increasingly unloved established high-street banks.

However people shouldn't get carried away thinking that Virgin is going to revolutionise the financial services world overnight. Yes this is a great launch pad, but it's also the start of a long and challenging journey. So if you think that Virgin Money will be offering the very best interest rates across the full range of banking products next year, think again.

Much as any financial player would love to be king of all the best-buy charts, capital restrictions, a regulatory minefield and the need to deliver a decent profit margin means such a strategy is rarely seen.

What I do expect to see from Virgin Money is a more transparent set of products, plenty of innovation and further evidence of its extremely high levels of customer service. I used to like its old strapline "no funny stuff, just money stuff", and think it still rings true today.

The level of competitiveness is an area that people will be watching closely as some of the existing Virgin products are priced at different ends of the spectrum. The range of credit cards is always there or thereabouts when it comes to the best rates and fees and the product has won countless awards since the launch back in January 2002.

On the downside, the Virgin cash ISA is offering a miserly 0.1 per cent AER, while the Northern Rock equivalent blows it out of the water with a return of 2.8 per cent AER with its E-ISA issue 2, so still some work to be done there.

With the merge due to take place on 1 January 2012, I'm sure it won't be long before the vivid red Virgin branding starts hitting the 75 Northern Rock branches, but with current accounts not due to be launched until 2013, the existing players in the UK banking market have probably got another 12 months of having it their own way before the full force of the new Virgin bank really starts to kick in.

Help for the builders - not the buyers

On Monday the Government announced details of a new mortgage indemnity scheme for first-time buyers. It will enable up to 100,000 to buy a new-build property with just a 5 per cent deposit, with the Government and house builders putting up security for the loan.

From the banks' perspective if the property is sold for less than the outstanding mortgage balance they will be able to recover the loss.

As the lenders are not taking on any additional risk, it will be interesting to see how 95 per cent LTV products are priced when compared to existing 90 per cent LTV deals. Hopefully there won't be evidence of profiteering.

The Council of Mortgage Lenders has welcomed the scheme, which it says should make mortgages up to 95 per cent LTV more widely available and enable more buyers to get on the housing ladder and thus support the flow of new housing development, with benefits for jobs and the wider economy.

Although the scheme sounds good on paper, there are some pitfalls for borrowers to consider, the main one being that some economists are predicting a 10 per cent fall in house prices over the next 12 months.

New-build properties have a reputation for being overpriced, and this in conjunction with a decrease in property prices across the whole market could see buyers faced with sizeable negative equity and saddled with a mortgage on a property they are unable to sell.

I question whether this move is more of a means of kick-starting the construction industry than of concern for first-time buyers; otherwise surely the Government would have looked at ways of utilising the hundreds of thousands of homes standing empty.

Andrew Hagger – Moneynet.co.uk