A new tribe of savings providers have thrown down the gauntlet to more established players in the market with a raft of eye-catching fixed interest rates. Comparison site Moneyfacts' best buy tables for one-, two-, three- and five-year fixed-rate bonds are populated by a mix of online providers, Islamic banks, and unknown brand names. These include OakNorth Bank, Masthaven, Bank of London and the Middle East (BLME) and Zenith Bank. Although many people understandably choose to avoid lesser-known names, fearing that they will not provide adequation protection for their cash, accounts offered by these providers can let you earn more interest.
There is a reason that many of the best-buy savings providers are specialist or niche players when it comes to lending. These providers offer non-standard finance, such as buy-to-let mortgages or loans that rank second in priority after an existing mortgage, says Andrew Hagger of financial researcher MoneyComms. Such products charge a higher interest rate, meaning the provider can offer a more attractive savings rate, because they enjoy a bigger margin between savings and lending rates.
These firms include Masthaven Bank, which has offered bridging loans and secured lending since 2004. It began offering savings accounts last year. Paragon Bank is a specialist mortgage lender, while OakNorth Bank offers loans to entrepreneurs and funds. Deposits with all three of these providers are covered by the Financial Services Compensation Scheme (FSCS). This scheme protects all UK-regulated deposits up to £85,000, per person, per banking licence, and pays out if a financial services firm goes bust or is unable to pay claims against it. You can visit the FSCS website to check if a savings provider is covered by the scheme. The FSCS register also includes some app-only banks, such as Atom, Starling and Tandem, as well as several Islamic banks, including Milestone Savings and Al Rayan Bank.
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Some other savings providers have head offices overseas, but have UK subsidiaries with full FSCS protection. These include the Union Bank of India and Bank of Cyprus UK. However, some providers based in other EU countries don't qualify for protection under the FSCS, but operate in the UK under the "passport" scheme instead. This means that if they went bust, savers would be able to claim up to €100,000 from the bank's home country's version of the FSCS. While there's nothing to suggest that these banks will go bust or that the relevant compensation scheme wouldn't pay out if they did, savers may be cautious about overseas protection schemes based on past experience. For example, when Icelandic bank Landsbanki went bust in 2008, the Icelandic state failed to reimburse foreign savers, forcing the UK government to step in and bail them out.
Finally, many Islamic banks offer tempting rates. At the moment, BLME has an 18-month bond paying 1.55%, while Milestone offers a five-year fixed-rate bond that pays 2.3%. One thing with these banks is that Sharia-compliant savings accounts pay an "expected profit rate", rather than an interest rate, in order to comply with Islam's prohibition on interest. "The provider invests the money deposited to generate a profit... that is then shared with account holders, so there is an inherent risk involved, as the return ultimately depends on the performance of the investments," says Tom Adams of comparison site Savings Champion. "Having said that, providers are keen to state that expected profit rates are usually achieved... We're unaware of any instances where this has not happened and most [will let you take] funds away before the end of the term if the expected profit rate is not likely to be met." But be aware that this isn't as straightforward as it sounds. An Islamic bank account is actually a relatively complex financial instrument and one that comes with risk.
In the news this week...
A survey by comparison site GoCompare has revealed that thousands of middle-class parents are committing fraud, many unknowingly, by claiming to be the main driver of cars driven mostly by their children. And it's hardly surprising they do, given young male drivers are often quoted annual premiums of £2,000 to £3,000, says Lucy Warwick-Ching in the Financial Times. But "fronting", as it is called, is serious. If detected, which insurers say is as easy as cross-referencing whose credit card is regularly used to buy petrol, insurers can refuse to pay out or try and recoup the cost from the parent as policyholder. Worse, the young driver "could be treated as uninsured" and fined hundreds of pounds, prosecuted and banned from driving. As an alternative way to lower premiums for their children, parents might consider putting themselves (or simply a much older adult) as a named driver, or fitting to the car a GPS-enabled device that sends information about driver behaviour to the insurer. Your child will also get the "added bonus of accumulating no-claims discounts more quickly as they can show they are a safe driver from day one".
Dutch bank Triodos is confident its new current account will appeal to customers, even though it charges £3 a month, pays zero interest on balances and doesn't provide a telephone banking service, says Rupert Jones in The Guardian. Triodos bills itself as "Europe's leading sustainable bank", with its selling point being that it only lends money if the recipient is "making a positive difference to society". It also publishes the details of every loan it makes. Triodos thinks it's fair that everyone should pay a "modest" monthly charge to cover the cost of providing a banking service, as "free" accounts are usually "subsidised with high penalty charges and hidden fees" that affect "the most vulnerable customers, or those making a rare miscalculation with the household finances". But the bank account does have some advantages for holders. If you get an authorised overdraft of £600 and use it for seven days each month, you'd incur charges of just £23.06 per year. With NatWest/RBS, you would pay £97.24.
Emma Lunn is a multi-award-winning journalist who specialises in personal finance and consumer issues. With more than 18 years’ experience in personal finance, Emma has covered topics including mortgages, first-time buyers, leasehold, banking, debt, budgeting, broadband, energy, pensions and investments. Emma’s one of the most prolific freelance personal finance journalists with a back catalogue of work in newspapers such as The Guardian, The Independent, The Daily Telegraph, the Mail on Sunday and the Mirror. As a freelancer she has also completed various in-house contracts at The Guardian, The Independent, Mortgage Solutions, Orange and Moneywise.
She also writes regularly for specialist magazines and websites such as Property Hub, Mortgage Strategy and YourMoney.com. She’s particularly proud of her work writing about the leasehold sector and a Guardian front-page story about a dodgy landlord. She has a real passion for helping people learn about money – especially when many people are struggling to get by in today’s challenging economic climate – and prides herself on simplifying complex subjects.
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