Falling for offers of cashback on mortgages and free legal fees and valuations may cost unwary home-buyers dear, warns Jeff Salway
BORROWERS risk being lured into expensive mortgages as lenders launch new incentive deals in an attempt to hit end-of-year targets.
Banks and building societies are offering cash back and other sweeteners to tie borrowers into fixed-rate deals and bolster their share of an increasingly competitive market. With low mortgage rates making a price war difficult to win, lenders have been forced to find new ways of securing new business.
“They want to lend again and a way to do this is to ensure they are up there in the sourcing tables,” said Alison Mitchell, mortgage expert at Robson Macintosh in Edinburgh. “Adding the sweetener of cashback makes sure that they stick out against the competition.”
Several major lenders now offer cash back on mortgages, while free legal fees and valuations are also commonplace. Barclays last month launched fee-free deals with up to £1,000 in cash back on a range of its new purchase mortgages, while HSBC and the Clydesdale are among the lenders offering up to £1,500 cashback to home-buyers.
Santander has cashback options available on certain mortgages, and Bank of Scotland (like Lloyds Banking Group stablemate Halifax) is promoting £500 Currys PC World gift cards for first-time buyers and home-movers who take out a qualifying loan by 6 December. The Halifax has previously offered to cover stamp duty – now land and buildings transaction tax in Scotland – for first-time buyers on properties up to £250,000.
For borrowers, however, such offers add to the difficulty in comparing different mortgages and working out the total cost of a loan. Deals with added incentives often come with a sting in the tail, such as high interest charges or fees that can reduce the sweetener to an expensive gimmick.
Of the 3,642 mortgages currently available, 2,667 come with incentive packages, according to new figures from Moneyfacts. The number of loans with some form of incentive attached has increased by more than 600 in just two years, said Charlotte Nelson, finance expert at Moneyfacts.
“Incentive packages, particularly cash rebates, are especially appealing to first-time buyers as they potentially lessen the burden on their savings, giving them more cash for the all-important deposit,” said Nelson.
Some lenders offer more than one form of incentive, allowing borrowers to tailor their mortgage choice to their benefit.
“However, more choice can mean it’s more difficult to compare options and gauge the potential benefits of an incentive package, particularly if it includes free valuation and free legal fees, which vary greatly according to the property price and may not negate the cost of a higher rate or fee,” Nelson added.
Most incentives are trivial and come with increased interest rates, said Mitchell, who warns borrowers against allowing such offers to influence their choice of mortgage.
Cashback should only be taken into account when working out the true cost of a mortgage, said David Rolleston, director of Mortgage Advice Brokerage in Glasgow.
“It can be very useful for people with limited cash funds and they are particularly attractive to smaller mortgage amounts as they represent a larger percentage of the mortgage balance,” he said.
“All the more reason why anyone looking for a new mortgage should seek independent advice as it does make things harder to compare.”
Advice can be especially useful in avoiding the trap of going for the lowest rate without taking the fees into consideration. The size of the fees charged on some of the most attractive-looking deals – including charges buried deep in the small print – can easily offset the savings made from taking a lower rate.
Borrowers can save some £1,500 in the first year of a mortgage if they take one with a higher rate but lower fees, said Nelson.
“The low-rate, high-fee favours those borrowers looking to purchase properties at the high end of the housing ladder. However, large fees can turn what appears to be a cheap deal into an expensive one.”
She used the example of the Post Office two-year fixed rate deal, which at 1.15 per cent is currently the cheapest on the market. But it comes with an arrangement fee of £1,995. The 1.89 per cent two-year fix from HSBC, in contrast, has no fee and offers a free valuation. Borrowers opting for the latter could save up to £1,500 in the first year alone than if they plump for the cheaper rate (based on a 60 per cent loan-to-value mortgage).
“With fees on mortgages ranging from nothing up to £2,794, with the average sitting at £939, it is easy to see why opting for the wrong deal can be a costly mistake,” said Nelson. “Borrowers choosing a two-year fixed rate will find the size of the arrangement fee particularly important, as the short-term nature of the deal means that borrowers will have to remortgage relatively soon, which could see them paying out yet another hefty fee.”