RIP for the rip-off

Bad deals for borrowers, bad deals for savers, but banks may soon be under pressure to change

You may actually do better keeping your money under the mattress than in a low-paying savings account. At least you can get at it right away. If you have pounds 10,000 saved up in a Northern Rock 60-day notice account you currently get 0.1 per cent interest. That's gross in all senses.

Generously, the building society turned bank gives you a 0.5 per cent annual bonus if you don't withdraw any cash from the account.

Adrian Coles, chief executive of the Building Societies' Association, is concerned by the huge discrepancies between savings rates offered to existing customers and the "teaser" rates on new accounts. He's concerned that many customers aren't aware of better deals. "It's important to have worst-buy as well as best-buy savings tables."

It's a fair bet that many of the people with their savings in pointless branch-based accounts are elderly or have little knowledge of how the savings market works. If they had even half a clue, they would have moved their long-term savings to one of Northern Rock's fantastically competitive bonds. Currently, those with pounds 10,000 can put it into a three-year bond paying 6.7 per cent gross. But it suits the banks to keep us in the dark.

It's the same story with mortgages, where those who are ignorant, confused or uninterested in personal finance end up paying over the odds. Either they stay on standard variable rates when they could negotiate a better deal, or they are locked into uncompetitive contracts.

This practice allows cheaper borrowing for new customers and those existing customers who are pushy enough to get the lender to offer them an "under the counter" deal.

As mortgages are so complex it's easy for lenders to make money from existing customers through a range of questionable practices. Foremost among these is not passing on interest rate cuts to consumers. Some of the big lenders did not pass on the 0.25 per cent June rate cut - the Nationwide stuck at 6.45 per cent. Only Abbey National responded immediately, cutting 0.1 per cent off its variable rate. At the end of June, Northern Rock managed to knock a paltry 0.06 per cent off its rate. A few lenders have made a point of passing on the full rate cut - among them Yorkshire, National Counties, Virgin Direct, and Sainsbury's Bank.

Other tricks include calculating interest only once a year, rather than daily. Most of the building societies do this, while new lenders calculate what you owe on a daily basis. Over 25 years, assuming no overpayments, annual interest will add pounds 1,743 to the cost of a pounds 75,000 mortgage. That's not too bad, but if you want to make any "overpayments" into your mortgage, annual recalculation has a more serious impact as the savings are not passed on.

This cynical treatment of customers has been a serious problem for years, but in the past two weeks the tide seems to have turned. There could be better times ahead, not just those with internet access (Egg's best interest rate, 5.75 per cent, is only available on the net) or a passion for researching cheap mortgages.

The new initiatives include:

A Treasury consultation paper on mortgages. This will help officials decide whether home loans should come within the umbrella of the new super- regulator, the Financial Services Authority (FSA). Last week, the Halifax broke ranks and came out in favour of regulation.

A government review of the banking industry is expected to force banks to become more competitive - and give us a wider choice of products that are easier to understand.

A White Paper on customer protection proposes to allow customers to complain and drive rogue firms out of business. Credit agreements will have to have more prominent warnings about missing payments.

The Consumers' Association also has new powers to challenge unfair clauses in mortgages and loan agreements.

The Consumers' Association: 2 Marylebone Road, London NW1 4DF; tel: 0171-830 6000. Egg: www.egg.com. Northern Rock fixed-rate bonds, tel: 0845 600 4466.

THE GAMES LENDERS PLAY

Asking you to take out compulsory home insurance with the mortgage. Remember you can get a better deal elsewhere.

Giving you the hard sell on a mortgage repayment insurance policy. Check if it covers your job, and find out how much a policy from a local broker would cost. These deals pay up to 40 per cent in commission.

Asking you to pay a high lending fee, otherwise known as a mortgage indemnity guarantee or protection (MIG). This pays lots of commission to the lender and does nothing for you. Try a different lender. Even better, save up a 10 per cent deposit.

Selling you life insurance: you can get a better deal elsewhere. According to independent statistics provider Moneypounds acts, the best deals are from Equitable Life, Marks & Spencer and Eagle Star Direct.

Selling you an endowment-backed mortgage. Unless you know what you are getting into, this could be an expensive mistake. Take no notice of sales people who suggest an endowment deal is better if you think you might move house soon. This is outdated advice - just check that any repayment mortgage you buy is portable between properties.

WORST-BUY SAVINGS

All examples assume a pounds 10,000 deposit. All except Northern Rock are instant access accounts.

Abbey Nat Instant Plus, 0.1%

Bristol & West Select, 0.1%

Halifax Cardcash, 0.25%

Northern Rock 60-day, 0.1%

90-day, 0.15%

120-day, 0.2%