The Pru takes on banks and building societies

Nic Cicutti examines the insurer's promises on savings and mortgages
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The next time you consider the possibility of opening a new deposit account or taking out a mortgage, who will you be giving your custom to? From next week, the Prudential hopes you will be making a beeline for its newly launched service.

The insurer is taking on banks and building societies at their own game, offering a range of home loans and two savings accounts which it claims beat the opposition into a cocked hat.

Initially, at least, the Pru is primarily hoping to convert its own existing customers to the new services it offers. The company has six million policyholders who receive payouts of pounds 1bn each year in maturing investments.

Prudential's research shows that up to 70 per cent of that maturing money is still in the policyholders' building society accounts a year later. Clearly, grabbing a slice of that money back is what underpins the Pru's deposit accounts.

Similarly, the Pru's salespeople arrange pounds 700m in mortgages for their clients every year. Except that until now the loans were arranged with other mortgage lenders. Again, diverting a chunk of that business back into its own coffers gives it a head-start when it comes to setting up a new bank.

The Pru hopes that the growing demand for telephone-based financial services - banking, mortgages or insurance - will allow it to offset the absence of a branch structure for its new bank. All the paraphernalia involved in a telephone operation are in place, with a new headquarters based in Dudley, in the West Midlands.

Martin Harris, chief executive at Prudential Banking, claims the products his new division is offering are those he once dreamed of when he worked at First Direct, the telephone bank launched by Midland Bank. He says customers have the benefit of knowing that they can contact any one of its 6,000 salespeople, who will there to help when needed.

But all the warm, friendly phone people and helpful salespeople in the world are of little use if the product you are selling is not up to scratch. Here, the Pru looks a bit more ordinary than it claims.

Underpinning both the savings and mortgage offerings are a set of guarantees. On the savings side, the guarantee is that the interest rate paid will beat the average of branch-based deposit accounts on offer from the top 10 banks and building societies.

Translated into pound signs, this means for its High Interest Deposit Account, which offers instant access to your money, a rate of 3.1 per cent gross is paid on deposits above pounds 500. This rises progressively to 4.75 per cent on savings levels above pounds 100,000.

Prudential's 60-Day Notice Account pays 3.85 per cent gross on minimum deposits of pounds 2,000, rising to 5.85 per cent for sums above pounds 100,000. In the second instance, the rates include a 0.5 per cent loyalty bonus if in each 12 months that an account is opened no more than two withdrawals are made and the balance remains above pounds 2,000.

The Pru's guarantee means that its rates are currently about 1 percentage point above the average of its rivals' branch-based deposit accounts. There are two problems, however. The first is that the guarantee only applies until the end of next year. One could argue that at least it is in place for the next 15 months.

The second problem is that the Pru, despite its protestations, is not comparing like with like. The rates paid on its instant access postal account are beaten by Alliance & Leicester, which pays 5.4 per cent gross on an admittedly high initial deposit of pounds 5,000. This rises to 6.3 per cent gross on deposits above pounds 100,000.

Birmingham Midshires is also ahead of the Pru on its some of its postal account rates, offering slightly less. Others with better savings accounts are Bristol & West, Northern Rock, Yorkshire, First Direct and even Scottish Widows Bank, which was the first insurer to set up a bank subsidiary and is now considering launching a mortgage range.

It is in the field of mortgages that the Pru does better, offering a range of reasonably priced loans. Although not quite the cheapest, they score highly in terms of their flexibility.

The Pru's variable rate is 6.99 per cent, with a discount of up to 0.7 per cent in place over the lifetime of the mortgage for loans with a loan-to-value ratio of 75 per cent, giving a true rate of 6.29 per cent. The interest charged rises to 6.69 per cent on a loan-to-value of 90 to 95 per cent. Repayment breaks are possible for up to six months.

The company also offers a variety of discounts and cashback deals and pledges that if cheaper rates become available they will be offered at the end of any discount period to both new and existing borrowers, unlike many other lenders. Mortgages are also transferable to a new home, while anyone switching to a Pru mortgage is offered a refund of their valuation fee, no booking or admin charges, and a special legal fees package.

More importantly, the Pru breaks with tradition in that it pledges not to operate a whole raft of hidden charges usually imposed by other lenders. Among the charges it refuses to impose are the full month's interest payable at whatever point in the month that a mortgage is taken out or repaid. In common with a handful of other lenders, it will credit any mortgage overpayments directly rather the at the end of the year. This means the actual cost of the loan falls more quickly.

As with Direct Line, the Pru also charges interest on a daily basis. In all, it estimates that its policy of openness will allow someone with a typical pounds 50,000 mortgage to saveover pounds 600 during the loan's lifetime.

The Pru's entry into the telephone banking market is a bit of a curate's egg. But by stimulating competition among rivals, it may lead to better savings and mortgage products that all of us can take advantage of.

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