Bargains on low-cost loans may come with strings attached

Moneysupermarket.com says the average two, three and five-year fixed rates are at their cheapest since 2012, so it is no surprise that demand for loans is climbing.

According to the Council of Mortgage Lenders, gross lending was more than £61 billion between July and September, 12 per cent up on the same period in 2014 and 18 per cent ahead of the previous three months of this year.

CML economist Mohammad Jamei said: “Mortgage lending is currently enjoying its best spell since 2008. Low inflation, strong wage growth, falling unemployment and competitive mortgage deals are all helping to support housing demand.”

Sales to first-time buyers are a key component of the increase. The National Association of Estate Agents says they accounted for 29 per cent of all sales in September, up from 20 per cent the month before.

Mark Hayward, the NAEA’s managing director, said: “We’re seeing a whole range of new competitive mortgage products coming on to the market, which is likely to be encouraging first steppers to take the plunge, as well as the fact that the impending interest rate rise has now been pushed back to next year at the very earliest.”

With rates expected to remain at historic lows for the time being, it is difficult for lenders to compete on price. As a result, many are turning to incentive packages in a bid to stand out from the crowd.

However, this can make it harder to work out which deals are likely to provide the best long-term value.

Comparison service Moneyfacts.co.uk says the number offering freebies of one kind or another has increased dramatically over the past five years. In October 2010, they were a feature of 1,626 out of 2,475 mortgages on the market. Today, it has risen to 2,667 out of 3,642 possible products.

Charlotte Nelson, finance expert at Moneyfacts.co.uk, said: “Now that rates have reached record lows, providers are looking for new ways to compete and attract borrowers. The incentive package fulfils this goal by offering new customers an enticing range of delights, such as free legal fees, gift cards and even cash rebates.

“Incentive packages, in particular 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.”

Clydesdale Bank is giving first-timers up to £1,000 cashback on completion and charging no arrangement fee, while Halifax is offering anyone who applies for a qualifying mortgage by 6 December a £500 gift card to spend in Currys or PC World.

Some deals include a choice of incentives. Ms Nelson said: “Several providers now offer multiple options within one range of products, which means borrowers can tailor their mortgage 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.”

Current market leading first-time buyer deals include a 95 per cent loan from Tesco Bank fixed at 3.89 per cent until January 2018 with total up-front fees of £495.

Clydesdale Bank, meanwhile, is offering a 95 per cent fee-free fix at 4.49 per cent until January 2019 with free valuation and £250 cashback.

For those who can raise a 10 per cent deposit, HSBC has a two-year discounted variable rate priced at 1.99 per cent. However, it comes with a whopping £1,499 fee. HSBC has a 2.38 per cent fix until January 2018 with fees of £449.

If you are planning to take out a first mortgage, draw up a shortlist with the help of online comparison sites or an independent advisor. Choose the ones that look best, and work out exactly how much you will have to repay with each one over the same period – say, three or five years, depending on the duration of the deal.

Factor in any up-front fees and the value of any cashback or other gift. If any of the loans include free valuation or legal fees, get quotes for these to see exactly what this would be worth.

Once you have worked out the true cost of each deal, you will be able to spot the most worthwhile incentive for your needs, or you could find it will be cheaper to choose a loan with no freebies but reasonable fees or a lower rate.

Ms Nelson said: “Freebies are always appealing but borrowers shouldn’t choose a mortgage based on its incentive package alone. Instead, mortgage applicants would be wise to look at the product in its entirety to ensure that the best deal is obtained.”

CASE STUDY

Demi Mack and Martin Valentine, from Edinburgh, moved into their first home in July with help from both their families.

Martin’s dad contributed towards their deposit, and they chose a fee-free 95 per cent, three-year fixed rate mortgage from Clydesdale Bank that paid £1,000 cashback.

Demi, who works as a telephonist, said: “It was the cashback that drew us to the deal, but the fact that there were no fees was also important.

“The £1,000 was in our bank account the week after we moved in, and we used it to pay the solicitor and to buy paint and wallpaper.”

Machine operator Martin and Demi have been redecorating the two-bedroom flat with assistance from her dad.

She said: “We’ve only got the hall still to do. It’s great having a home of our own – we’ve got so much freedom and we can do exactly what we want.”