Nice car, shame about the mortgage

Simon Pincombe looks behind the 'free' offers from lenders

When it comes to earning a crust, it is difficult to judge who has been harder hit - the mortgage broker or the car salesman. But clearly, commission has been sufficiently thin on the ground for the two to get into bed together. The result is the inappropriately named free car mortgage.

How many cars are eventually shifted in a stagnant housing market depends very much on whether the lethargic borrower can be persuaded to remortgage by an offer of a free Mini (if you borrow pounds 100,000), or an N-registered Rover 800 Coupe (pounds 400,000). Alternatively, there is a free Renault Clio for a year (minimum loan of pounds 45,000). But you do get 12 months' road tax, insuranceand a 6,000-mile service thrown in.

Car manufacturers are quick to point out that this is a brokers' initiative. Brokers are desperate to drum up business and there are an estimated six million borrowers currently paying their lender's standard variable rate.

The question is not whether these people should remortgage - they should, or at the very least strike a better deal with their existing lender. If you owe less than 75 per cent of the value of your property and are paying the standard rate (currently 8.4 per cent), you could save a lot of money. If the deal is concluded before 1 October, you will qualify for the current level of state mortgage support if you lose your job.

Many borrowers have been put off remortgaging because, as our table shows, it costs money now to make savings in the future. Also, the enthusiasm with which lenders have been attacking their rivals' loan portfolios has inevitably led to a proliferation of defensive measures. Loyalty bonuses are increasingly common and redemption penalties are increasingly onerous (as the Northern Rock building society has so admirably demonstrated). But that does not mean that there are no savings to be made.

It boils down to how you value the incentives. The three key issues to consider when remortgaging are 1) do you really want a Mini or cash up front? 2) what will it cost you to get the benefit? and 3) for how long are you going to be tied into your lender afterwards?

The table compares the broad range of remortgage deals currently on offer, costing them over three years (the minimum redemption penalty period.) The calculations are based on an interest-only repayment mortgage of pounds 100,000 on a pounds 250,000 property and assume mortgage interest tax relief at 15 per cent on the first pounds 30,000 of the loan.

The most noticeable feature of the car, cashback and 10 per cent repayment remortgage packages is that they have long "tails'' which lock the borrower into the lender's standard variable rate long after the incentive has been taken. In the case of the Britannia building society, you are locked in for seven years. By contrast, the Bradford & Bingley and Stroud & Swindon offers come with three-year penalty clauses which expire when the incentive does. That allows the borrower to look again for a better deal .

If you took the free Mini package, the cost of the mortgage after three years works out at pounds 25,028. That compares with pounds 19,462 on the Bradford & Bingley's three-year discount deal.

Is it worth the difference of pounds 5,566 to have a Mini? Well, if you have a burning desire to own a Mini, maybe.

According to Chase de Vere Mortgage Management, who are marketing the scheme, the Mini is worth pounds 6,381 on the road. But if you were buying it from a showroom, you could probably haggle a 10 to 15 per cent discount and a reasonable finance deal. You may still pay more than the pounds 5,566, but not much.

So you could take the Bradford & Bingley mortgage, buy your own Mini, and be only a couple of hundred pounds out of pocket after three years. But you would not be locked into the National Counties variable rate for another two years. And you would not be facing a potential capital gains tax bill if you cannot swallow the invoice value of the car in your annual pounds 6,000.

True, you could entitled to a further loyalty bonus of pounds 14,250 if you stayed with National Counties for the full 25 years. This kicks in during year six with pounds 500 and rises to pounds 750 annually by year 11. But the Bradford & Bingley route means you can redeem the mortgage after three years and shop around for another deal with an equally generous loyalty bonus. Or if interest rates were on the rise, you might fancy a fixed-rate deal instead.

The Renault Clio deal costs a total of pounds 24,929 over three years - pounds 5,467 more than the Bradford & Bingley deal. And you only get the car for a year, after which you can buy it at trade price.

But on a pounds 100,000 mortgage, the Chelsea cashback deal is worth pounds 5,000 up front. The mortgage costs pounds 24,936 in the first three year - pounds 5,474 more than the Bradford & Bingley. If you need pounds 5,000, this a cheap way of financing it. However, you are locked into the Chelsea variable rate for another two years. Again, you are prevented from going for another cheap deal and you cannot hedge against rising rates.

Similarly, the Britannia package - which repays 10 per cent of your mortgage after five years - would be worth pounds 10,000 on a pounds 100,000 loan. That would cost pounds 25,326 after three years - pounds 5,864 more than the Bradford & Bingley deal. But for the saving of pounds 4,136, you must stay with Britannia on its standard variable rate (currently 8.44 per cent) for a further four years. During that time, you would have been free to hunt around if you had taken the Bradford & Bingley option - you might get another similar deal, assuming it was still available.