Northern Rock's unlimited guarantee all washed up

If you are one of the thousands of people who moved their nest-egg to Northern Rock to benefit from the government's unlimited 100% guarantee on savings, now may be the time to start thinking about shopping around for a better interest rate. That is because the Treasury this week announced its promise to underwrite all savings at the state-controlled bank will formally end on 24 May. This will bring Northern Rock into line with the rest of the UK banking sector, where only the first £50,000 is protected, and follows complaints from rivals – particularly building­ societies­ – that it had an unfair advantage.­ The government was upbeat,­ saying this demonstrated the bank had returned to a stronger financial footing since being nationalised,­ but, as Martin Lewis of MoneySavingExpert.com put it: "Let's not lose sight of the fact that, in practical terms, this is a loss of protection for savers." The guarantee on Northern Rock deposits­ was introduced on 17 September 2007, in an effort to calm the panic that saw 10s of thousands of savers descend on branches after it sought help from the Bank of England. It became one of the first victims of the credit crunch following reckless lending during the housing boom, and was taken into public ownership in 2008. Under the Financial Services Compensation Scheme – which was beefed up after the financial crisis began – the first £50,000 of any deposit is protected­ if a bank fails. This week's announcement particularly affects people with variable rate savings accounts. Those who have a fixed-rate account with Northern Rock, such as a savings bond, will continue to enjoy 100% protection until the end of the account's term. Building societies had complained that the unlimited guarantee gave Northern Rock an unfair advantage, allowing it to borrow money at a cheaper rate and offer better deals to savers. "Societies are fast becoming the only providers of financial services not to be directly subsidised or supported by the state. Banks, National Savings & Investments and the Post Office all have significant public sector support," the Building Societies Association says. The change is likely to provide a boost to National Savings, which says, as it is backed by the Treasury, "you can rest assured that all your capital is 100% secure". Lewis says that, even though the unlimited 100% guarantee is going, "it would be ludicrous for the government to flog this bank to a company that would allow it to go bust. If it did, it would call into question our entire method of government". But he adds: "Having said that, if you're saving over £50,000, spread it around a number of institutions to ensure more of it is protected." There will be some who put their money in Northern Rock purely for the guarantee and, in the process, may have sacrificed getting a decent interest rate. These people may as well focus on getting the best return. Justin Modray, director of financial guidance website candidmoney.com, reckons Northern Rock rates are uncompetitive with the best in the market, "and are, in some cases, downright awful". Northern Rock has been split into a "good bank" which will hold its savings and offer new loans, and a "bad bank" which will be left with many of its legacy mortgages. The virtuous part is expected to be sold to a private bidder after the general election. The Liberal Democrats, though, believe Northern Rock could, instead, be "re-mutualised". Vince Cable, the party's Treasury spokesman, argues this would not necessarily prevent the taxpayer receiving a return on the billions used to save the institution. • Britain's oldest building society succumbed to the financial crisis this week as it announced a rescue deal with its larger rival Skipton. The takeover will end 165 years of history for the Chesham, though the name will continue to be used for the society's existing accounts. Chesham, which has three branches and 21,000 members, says the merger will offer it the security of being part of a larger group after being squeezed by record low interest rates and competition for savings. Skipton has committed to keeping Chesham's branches in Chesham, Aylesbury and Little Chalfont,­ and an agency in Tring, for a year after the deal completes – due to be 1 June – after which it will look at it as part of its wider branch review.