Afraid of switching to a challenger? You’re better protected than you think
Disruption is often a good thing for an industry and nowhere has that been more apparent in recent years than in the retail banking world.
Challenger banks have been a (relative) saving grace for beleaguered savers – they have been the driving force behind rates gradually moving upwards. Take a quick look at the best buy tables and names such as Charter Savings, Atom, Ikano and Paragon dominate.
Unlike the well-known household brands, these institutions actually want your money and are willing to pay for it.
But these challenger banks aren’t just making a dent in the savings world. They are taking aim at the mortgage industry too.
Digital-only Atom Bank stunned the market recently with the announcement it was offering five-year fixed rate mortgages for the price of a two-year deal.
Rates started at 1.29% for a 60% loan-to-value (LTV) with a £900 fee, and 1.99% up to 90% LTV with a £900 fee.
The 1.29% deal was pulled just seven days later following unprecedented demand.
The energy industry has also seen a deluge of new players.
Official figures from Ofgem show the regulator awarded a total of 73 gas and electricity licences to domestic suppliers in 2015 and 80 in 2016.
Gas and electricity customers appear to be getting on board with lesser-known, independent suppliers with 47% of the 7.7 million switches that took place in 2016 going to small and medium sized firms, according to regulator Ofgem.
But that means more than half of customers are sticking with one of the ‘Big Six’ firms – British Gas, EDF, E.On, Npower, Scottish Power and SSE.
It could be these firms offer the best deals. But just as likely is people are still wary of switching from their incumbent supplier.
News of smaller suppliers such as GB Energy going out of business no doubt adds to people’s scepticism. Even so, some of the most popular tariffs were with challengers such as Green Network Energy and PFP Energy, according to Comparethemarket.
What happens if things go wrong?
If you’re one of the many people nervous about switching from a big brand, the truth is you’re better protected than you probably think.
When it comes to your savings, if your bank or building society goes bust, the Financial Services Compensation Scheme (FSCS) protects up to £85,000 per person, per banking licence. Remember, it’s not £85,000 per account. And if two brands fall under the same licence – for example Halifax and Bank of Scotland – the limit is £85,000 combined.
Some of the overseas challenger banks may be part of their country’s compensation scheme. If they are, you’ll still be protected, although it could take longer for you to get your money back.
You can check if a bank is part of a compensation scheme on the Savings Champion website.
Borrowing from a relatively unknown mortgage lender may not be as worrying as handing them your hard-earned cash but you may still be concerned about any disruption to your mortgage should your lender go bust.
If the bank fails, the mortgage debt isn’t written off but is either managed by a third party or sold to another lender.
“The issue that could arise is that the new owner of your debt does not have as favourable a rate,” says Andrew Montlake of mortgage broker Coreco. “Or has a much higher variable rate. If you can remortgage away then this doesn’t really matter.”
New lenders are carefully regulated so Montlake doesn’t think borrowers should be overly concerned with opting for lesser known names – especially if they offer the best rate and the right product for your circumstances.
New energy suppliers are heavily vetted by the regulator Ofgem before they are granted a licence and only two firms have gone bust since 2008.
If your energy firm fails, your supply will not be affected. Your credit balance will also be protected. Ofgem will appoint a new energy provider and although you’re likely to pay more with your new supplier as the firm hasn’t had a chance to carry out the usual background credit checks on you, you can shop around and switch straightaway to a better deal.