Loyalty buys you nothing so shop around for the best rates

A study of interest rates by the Irish Financial Services Regulatory Authority (IFSRA) published last week has revealed no clear winner across the range of personal financial products surveyed.

Over the period from January 1998 to June 2003, EBS Building Society has emerged as the cheapest for standard variable rate mortgages, but had the highest average interest rate on credit cards.

Conversely, National Irish Bank was competitive on credit cards but one of the most expensive for variable rate mortgages.

Another random example is First Active, which emerged with the best value for personal loans over the period, but lagged behind in the category for one-month notice deposits of more than €20,000. Meanwhile, AIB was third best for mortgages but mid-table for overdrafts and personal loans.

The consumer watchdog is on a mission to explode the myth that customer loyalty pays off, hoping that consumers will shake off their inertia and hop from one financial institution to another in a bid to secure the best rates.

The Irish Bankers' Federation endorses this mission.

"One institution may be coming up roses in one category, but they might not necessarily be good in another category," says Mr Felix O'Regan, IBF spokesman.

"The message for the consumer is that it doesn't follow that any one institution will be the best value across the board.

"So you might be better off putting your eggs in one basket and getting a special package deal or it might work out cheaper if you spread your eggs around on a competitive basis.

"The important thing is that the consumer is aware of both options."

It was in the days when middle to high-income earners (often the male "head" of the family) had personal relationships with their long-standing (and also male) bank managers, that the premise "give the bank your money, and they will give you theirs" caught hold.

Tee off on the golf course together every now and then, and customers could go home under the impression that they had secured preferential interest rates, more generous credit approvals and all round cheaper deals, wrapped up with a firm handshake and a flourishing signature. Today, consumers rarely get to be on first-name terms with bank managers, either because they move from branch to branch or are encouraged to use online and telephone banking services operated from faceless customer support centres.

With centrally set lending policies and targets in place, individual branch managers have less discretion now anyway. So consumers have little to lose by being unfaithful.

There is, however, much to gain.

IFSRA indicated that, based on a €250,000 mortgage repaid over 25 years, consumers could save more than €100,000 if they chose the cheapest rather than the most expensive mortgage lender.

The savings may have been skewed by the fact that the most expensive lender, Irish Nationwide Building Society, submitted the wrong information to IFSRA.

But even ignoring Irish Nationwide, which has a reputation for not passing on interest rate cuts in full to all customers and charging high amounts of penalty interest to borrowers in arrears, there are still substantial sums to be saved.

The IFSRA report on interest rates shows that, over the period studied, the second most expensive lender for standard variable rates, National Irish Bank, had an average rate of almost 5.1 per cent compared to just under 4.5 per cent at EBS Building Society.

A typical variable rate customer at EBS would pay around €25,000 less in total interest repayments than the NIB customer, based on a €250,000 mortgage over 25 years.

IFSRA's average interest rate figures exclude both fixed-rate mortgages and one-year special discount rates.

The latter have often been described as a marketing strategy designed to lure in first-time buyers, making it affordable for them to borrow as much as possible.

But mortgage brokers do not believe that these rates are any indication of long-term value, pointing to a trend for those with the best discounts to have above-average standard variable rates.

For example, ICS Building Society and Permanent TSB both offer a very cheap 12-month discount variable rate of 2.69 per cent to new customers, but their standard variable rate is not so healthy at 3.55 per cent.

At some lenders, including Permanent TSB and Bank of Ireland, customers who opt for one-year discounts are then prevented from reverting to their "tracker" mortgage rates, which are always cheaper than the standard variable rate but only offered to new customers.

Thus in the case of tracker mortgages at some lenders and special one-year discounts at most lenders, financial institutions are effectively rewarding new customers at the expense of existing ones.

IFSRA, which points out that switching your mortgage should cost no more than €1,000 in various legal and administrative fees, is encouraging consumers to vote with their feet, or at least threaten to do so in a bid to negotiate better deals. Accept the official rate, fees or charges on offer and consumers are likely to be ripped-off, IFSRA is implying.

Instead, we should be willing to up sticks and hope that the trail of dust we leave in our wake is enough to cause our bank to splutter up some kind of financial incentive.

There is anecdotal evidence that the main banks will waive service charges or offer a free bundle of transactions on current accounts when customers attempt to move to an institution where they can avail of free banking - in other words at National Irish Bank, Ulster Bank and Permanent TSB.

According to mortgage adviser Mr Liam Ferguson of Ferguson & Associates, haggling on home loans is becoming the order of the day.

"With the advent of tracker mortgages, I'm hearing various stories where people have told their bank they are moving because Ulster Bank will give them a tracker rate of 2.95 per cent and a free switch, and their bank has come back and said 'okay, we'll match that rate'," he says.

"If someone is on an uncompetitive rate, they would be well-advised to pick up the phone and say 'I know there's better rates out there, I'm going to move my business unless you give me the same rate'.

"The key, as with any similar threat, is that you have got to be prepared to follow through," he adds.

It is a common misconception that consumers are more likely to get approved for higher sums or be given preferential rates on a mortgage if they already hold a current or deposit account at the lender.

"A lot of lenders will look at your current account to see if you can show by reference that you can pay rent and save at the same time as well.

"So they might say 'okay this person can pay €400 a month in rent and they have still managed to save €400 a month'," explains Mr Ferguson.

But it doesn't make a bit of difference to the lenders where it is that you hold your current account, he says.

One exception to the rule is at Ulster Bank, where U First current account holders are given a discount of 0.1 per cent on an already cheap tracker mortgage.

With personal loans, some banks may look more favourably on their own customers because the loans are not secured on anything, Mr Ferguson adds.

"But the message to consumers is don't be loyal to any one institution," he concludes.

"No one bank is more competitive in all areas of personal banking than the rest."