When Loyalty Doesn't Pay

Why loyalty to your bank could turn out to be a costly mistake and why it always pays to shop around.

Are you a loyal customer? Do you buy all the financial products you need from your own bank?  While it seems like the easy option, it often doesn't lead to the best deal for you.

Fool partner, Moneyfacts, has recently looked at a whole range of products to find out how competitive the deals offered by high street banks really are.  

The research shows that many best buys products aren't found at the Big Five. But that's no great surprise. After all, with some high street banks offering interest rates of just 0.1% -- or worse still, no interest at all -- on credit balances in current accounts, it doesn't take much to find a better offer elsewhere.   

In this article, I'll look at two products in more detail -- mortgages and savings accounts -- and show you how much you could lose if you stay loyal to your bank.

Firstly, let's take a look at the mortgage deals:

The table below shows the true cost of a two-year fixed rate mortgage from the biggest high street lenders and compares them with the best buy deal. The 'true cost' takes into account the interest rate and mortgage fees where they apply. The figures are based on a mortgage loan of £150,000 and assume the borrower has a deposit of 25%.  

High Street Lender Mortgages Versus The Best Buy Deal

Source: Moneyfacts as at 11.08.08. *Figure based on a 3-year fixed rate deal over 2 years.

If you're a loyal customer of Barclays and you take out a fixed rate mortgage with them, after two years you would have lost over £2,000. This could easily have been avoided by shopping around for an alternative best buy deal. Likewise, a mortgage deal with Lloyds TSB would also lead to a loss of more than £1,100.  

But it's fair to say the high street banks don't always trail miles behind the best buys. The margin between Royal Bank of Scotland and the most competitive mortgage is tiny at just £32. That said, most of the time, borrowers would be better off applying somewhere else.

Of course, there's no harm in finding out what your own bank has on offer when you need a mortgage or remortgage. But make sure it isn't the only place you look. An independent mortgage broker -- such as The Motley Fool Mortgage Service -- can help you search the market and probably get a better deal.

Now let's look at savings accounts:

The following table compares accounts from the high street banks with the best buy account. The figures are based on savings of £5,000 deposited in a standard instant access account.

High Street Bank Savings Accounts Versus The Best Buy Deal

Source: Moneyfacts as at 11.08.08.

When it comes to savings accounts you could lose out on a great deal by sticking with your own bank. For instance, you can earn twelve times more interest by choosing the most competitive savings account instead of an easy access account with Halifax. In fact, choosing Halifax means you could lose out on a massive £283 in interest over a year.

None of the high street banks measure up well against the best buy. Even Barclays -- the closest competitor -- would pay you £121 less in interest, so it really pays to look at all the options first. In fact, it's really easy to compare best buy accounts at The Motley Fool Savings Centre.

The market-leader today for easy access accounts is Kaupthing Edge Savings -- which pays an interest rate of 6.55% AER -- but you won't find its branches on any of our high streets. True, Kaupthing isn't as familiar to us as the Big Five, but that doesn't mean it should be ignored.

It's easy to understand why a borrower or saver might be tempted to stay loyal to their bank. But loyalty doesn't always pay. Make sure you don't make the same mistake.

More: It's Official: British Banks Are Bad! | Are You Happy With Your Bank? | Compare mortgages, loans, credit cards and savings at The Fool.