The hidden fee in free offers

The hidden fee in free offers

When does free money cost more than you think? When financial institutions start giving it away, it seems. Over recent months, banks and building societies have been trying to lure customers to switch loans or current accounts with the offer of hard cash. But are these bribes worth switching for?

Last week, Nationwide joined the fray with its new mortgage challenge, offering £150 to homeowners if they can get cheaper mortgage repayments elsewhere. NatWest also has a mortgage challenge, offering £250 in cash if it fails to offer you cheaper repayments than your existing lender.

On the current account front, First Direct, Citibank, LloydsTSB and Alliance & Leicester all offer between £50 and £75 if people switch to their products.

While 'mortgage challenges' in themselves are not new - many companies invite borrowers to see if they can beat their mortgage deals - the idea of offering cash if they are wrong is relatively new.

'These offers are little more than a marketing gimmick, a desperate attempt to win business in a competitive environment,' says Melanie Bien, associate director of mortgage brokers Savills Private Finance. 'They can be appealing to customers as they appear to be money for nothing but in reality lenders aren't in the habit of giving money away and these "challenges" are so limited that they probably won't end up having to.'

The offers are more restrictive than they may first seem. NatWest.....continued below

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will only pay the £250 to those coming to the end of their mortgage deal with Halifax, Abbey, Lloyds and C&G, and if its 4.49 per cent two-year discount rate fails to be cheaper than the standard variable rate of those lenders. In addition, to be eligible for the offer the borrower must have a mortgage of at least £30,000, with a loan to value (LTV) of no more than 75 per cent.

Broker Bradford & Bingley says borrowers also need to look beyond the rate and be cautious about the impact of fees. 'Lowering monthly payments is easy to achieve, and is futile unless it ultimately saves the borrower money over the life of the deal,' says Duncan Powell, mortgage development manager at B&B. 'There could be a number of instances where a borrower actually ends up paying more because of the fees they have to pay.'

It cites the example of a borrower with a £100,000 loan over 20 years with a two-year fixed rate deal at 4.79 per cent - with no arrangement fee - who switches to NatWest's two-year fixed rate at 4.65 per cent. Monthly payments would fall from £648.41 to £640.77. But when the bank's £395 arrangement fee is factored in, the borrower would end up £212 worse off over the two-year period.

Nationwide's mortgage challenge is more reasonable than NatWest's. It includes the building society's fixed and tracker rates as well as its discount, but again, the £150 is only on offer to customers of Halifax, Abbey, C&G, Woolwich, HSBC, NatWest and Northern Rock.