Cars the latest perk in the fight for home loans

THE MORTGAGE BUSINESS, owned by the Bank of Scotland and National Counties Building Society, stirred up the mortgage war last week by offering a new type of gimmick - a car instead of a cashback or interest rate discount.

TMB claims to have received 500 inquiries already in response to its offer of the use of a Renault Clio - taxed, insured and serviced for 12 months - to anyone who takes out a mortgage or remortgage of at least pounds 45,000. TMB's standard variable rate is 8.29 per cent, and it also offers a pounds 250 cashback to help with mortgage fees.

But there is a completion fee of pounds 299 in addition to survey and legal fees, and borrowers will be charged a substantial penalty - four months' gross interest - if they redeem within four years, and one month's interest after that.

Chase de Vere and National Counties Building Society also claim to have had a good response to their offer of a free Mini, worth pounds 6,381 on the road, for borrowers who remortgage with them for at least pounds 100,000. The current mortgage rate is 8.39 per cent, but there is a five-year penalty "tail" on the offer. If it is paid off in full or in part within that time, a fee equal to 6 per cent of the loan will be required.

The car's invoice value could also be liable to capital gains tax if other gains are made during the year. The offers have been criticised by consumer lobbies, increasingly worried at the impact of cashback and discount offers on the mortgage lending business.

Most offers now represent between 3 and 6 per cent off the value off a loan and subsidised loans must be averaging at least 10-15 per cent of the value of most lenders' loan portfolios. Although most mortgage lenders have made good margins on mortgage business in the past, the volume of business is little more than half the peak levels in the late 1980s. The upturn in house repossessions in the first half of 1995 and the sharp downward revision in house price forecasts from analysts at UBS this week add to the generally gloomy outlook. They now expect a 3 per cent average drop in prices.

Business could grow in the next two months, as buyers rush through deals to beat the deadline of 1 October, after which borrowers taking out new mortgages and remortages will have to wait nine months for income support to start paying their mortgage interest.

But any artificial surge in business will be balanced by a likely drop in demand for mortgages after the deadline has passed.