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The banking industry faces a major shake-up after the competition watchdog this week called for a wide-ranging 18-month inquiry that could bring an end to the dominance of the big high-street banks and even, in some cases, their break-up.
The new watchdog, the Competition and Markets Authority, has criticised the status quo in which four fifths of accounts are held with the four biggest banks. It wants to see more customers switching and so-called challenger banks taking further market share.
However, there is no reason for you to wait for the results of its investigation to switch to the better deals that these smaller players — some of which you may never have heard of — frequently offer.
Rachel Springall, of Moneyfacts.co.uk, the financial website, says: “Challenger banks are a great option. Even though they don’t bathe in the spotlight in the same way the high street banks do, they offer decent deals and often beat the big players.”
For instance, if you are after a straightforward easy-access savings account, the best rates are with Britannia at 1.4 per cent and Virgin Money at 1.3 per cent. In comparison, the most competitive rates from the big banks are 0.75 per cent with HSBC and First Direct and 0.5 per cent with NatWest. You can earn 1 per cent with Santander, but that headline rate is inflated by a one-year bonus.
Meanwhile, if you’re looking to take advantage of your new super Isa allowance, the best rates on a one-year fixed deal are 1.71 per cent with Britannia and 1.65 per cent with Aldermore, Julian Hodge Bank and Tesco Bank. The best that you can get with the big banks is 1.55 per cent with Halifax.
In longer-term, non-Isa fixes, you can get 3.25 per cent over five years with Vanquis Bank, which compares with the highest rate from a big bank of 2.35 per cent with Bank of Scotland. When it comes to mortgages, Ms Springall says that big banks often offer the lowest headline rates but challenger banks and mutuals frequently deliver the best deals when you look at the whole package, including factors such as fees.
For example, HSBC offers two-year fixes at 1.59 per cent, but Moneyfacts says the best two-year fix is with Norwich & Peterborough Building Society (N&P), at 2.09 per cent. The N&P deal has minimum fees of £345 but you will pay £1,999 with HSBC.
Ms Springall adds: “As with any mortgage, consumers must weigh up the overall package of the deal, including fees and incentives, and not be swayed by just the interest rate.
“Many of the lowest rates on the market are loaded with high upfront fees, so these may not be as cost-effective in the long term, depending on how much is borrowed and for how long.”
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