Pegged down and losing out

Can loyalty to your bank bring you just rewards? What might look like a great offer could be anything but once all the lender's conditions are met. Chiara Cavaglieri investigates the rise of tied products

As a shopper you're used to offers coming with strings attached, but what about your mortgage or current account? The number of "tied" products – where a particular rate or special offer relies on you opening another account – has increased dramatically since the beginning of the year. New figures from Which? show that as banks aim to become a "one-stop shop" for all their customers' personal finance needs, the proportion of financial products tied to another product with the same provider has doubled in some instances.

Which? says the number of tied fixed-rate mortgages has shot from 9 to 18 per cent between January and June of this year, and 15 per cent of regular savings accounts are tied, up from 11 per cent at the beginning of the year. The consumer organisation has warned that many of these linked products offer poor value for money and discourage shopping around, but should you really be worried?

Which? gives the example of First Direct, which is currently offering a five-year fixed-rate mortgage at 4.19 per cent for customers borrowing at 65 per cent loan to value (LTV). This is one of the cheapest deals around but is available only if a First Direct current account is taken out as well which pays no credit interest.

Which? argues that not only can consumers get a slightly better mortgage rate from ING Direct but they can also benefit from a better current account paying a good credit interest, such as Alliance & Leicester's preferred in-credit rate account which pays 5 per cent, fixed for one year. However, the arrangement fees on the First Direct product are only £99 compared with £945 for ING.

While this is a better option in a perfect world, for many people, getting all of the best buys across the financial board is too time consuming. Moreover, the significant benefits of a cheaper mortgage or a savings account paying a decent rate of return will easily outweigh the sacrifice of in-credit interest on a current account.

According to analysts Defaqto, there are currently 872 base rate tracker mortgages available and 231 of these are restricted, with the bulk (19 per cent) exclusive to the lender's current account customers. "The current account is regarded as the key relationship-building product with their customers, as, provided that it is the consumer's main current account, it gives a much greater understanding of the customer's financial status and capabilities," says David Black, banking expert at Defaqto.

This leaves banks able to cherry-pick the best borrowers for their unsecured loans and credit cards from their customer base and reward them with better rates, lower fees or an increased LTV. A mortgage product that stands out is the Co-operative Bank's Lifetime Tracker at Bank of England base rate plus 1.99 per cent for a maximum LTV of 75 per cent. This also has no arrangement fee but is available only to its current account customers.

Despite the potential for some great deals, it's important to weigh up the benefits and drawbacks to any tied products. The First Direct case is a useful example. Here, an attractive mortgage is of enough benefit over the five years to warrant taking out what is actually a very good current account. The 1st Account does require you to transfer at least £1,500 of your income every month, but it also offers £100 cash for switching, a £250 interest-free overdraft and has a renowned excellent customer service record.

"Linked products can be a good option if they fit in with your existing need," says Michelle Slade from financial information service Moneyfacts.

Where things get more complicated, however, is when a linked product falls too short of the market best buys. For example, HSBC's Regular Saver has caught the eye of many savers with a rate of 8 per cent, fixed for one year on regular monthly deposits of £25 to £250. But this is available only to its fee-paying current account customers costing from £8 per month, or for the Premier account, if you have savings of at least £50,000 with HSBC or you pay in an annual income of at least £100,000.

Another issue is that the linked product may be a much riskier investment. Nationwide, for example, offers a one-year combination savings bond paying a healthy 3.5 per cent on deposits of at least £3,000, but requires savers to invest an equal amount in a six-year stock market linked bond at the same time. Similar combination products are available from Yorkshire and Barnsley as well as Santander which requires applicants for its Super Bond (issue 22) paying an impressive 4.5 per cent, but only for customer investing an equal amount in a qualifying investment product.

"Many of the higher paying tied savings products require you to open a riskier investment product. If you are risk adverse, it isn't advisable to change your investing habits just to get a slightly higher rate on a cash savings account," says Ms Slade.

Among some of the better tied-in products are Santander's Super Fixed Rate Monthly Saver 8, which pays 6.00 per cent. Although you must have a current account with Santander, many of these accounts themselves are highly competitive. Norwich & Peterborough's Gold Savings account pays 5 per cent. To qualify you must have or open the NPBS Gold Current Account, but if you fund the current account with £1,500 per month you get an overdraft rate of only 11.74 per cent.

Expert View

Michelle Slade, Moneyfacts

"If the provider offers a competitive deal on both of the tied products, it is certainly worth considering. But in some instances one of the products may be far less competitive, which could wipe out any benefits. Customers may find they would be better off opting for the best-buy deals of unlinked products."