James Daley: If there's no such thing as a free lunch, what does a free car cost?
Saturday 01 May 2004
West Bromwich Building Society caused a bit of a stir in the personal finance world last week by announcing it was to become the first ever lender to give away a free car with every mortgage.
West Bromwich Building Society caused a bit of a stir in the personal finance world last week by announcing it was to become the first ever lender to give away a free car with every mortgage. As West Brom well knows, it's the kind of offer that is quite hard to ignore. For most people, buying a car is a fairly big deal, and normally takes some financial planning and perhaps some saving too. So to be offered a free one appears to be too good to be true.
What's more, the catch - there is of course a catch - doesn't appear to be too onerous: stick with West Brom's standard variable rate, currently a reasonably competitive 5.99 per cent, for five years - then you're free to transfer to anyone you like.
West Brom's offer is, however, not quite as great as it sounds. In fact, for most people, it will be totally unsuitable. Unfortunately, this will be unlikely to stop people signing up in their droves.
The problem with this sort of give-away is that it takes your eye off what's most important - as the likes of West Brom are well aware. Sainsbury's Bank offers 30,000 nectar points with its flexipay mortgage (enough for a free flight to just about anywhere in Europe), MBNA gives away Accurist watches with its credit cards, and HSBC hands out driving lessons with its student accounts.
The firms behind these handouts remain adamant that there is nothing wrong in using customer enticements in a competitive market. But the truth is that this sort of practice is not far short of plain irresponsible. Sure, taking freebies to open a bank account, which has no tie-ins, is pretty harmless. But when you're encouraging punters to take out credit cards by giving away gifts or offering free cars to bring in mortgage customers, you will undoubtedly get people bending over backwards to take on products which they should never have gone near.
Taking out a mortgage is, for most people, the biggest single financial transaction they will make in their lives, and ensuring that your monthly payments are manageable, both now and in the case of potential rate rises, is the most important factor to consider. Not whether or not you get a freebie.
The best deals on the market at the moment are almost 2.3 percentage points cheaper than West Brom's free car offer - a saving of nearly £300 a month on a £150,000 mortgage - which is real money to most people. Tying yourself into a standard variable rate for five years is dangerous too. You'll take the full hit on every rate rise - and who knows what will happen to rates between now and 2009? One thing is certain, the next movements will be upwards.
But this will be the last thing on the minds of those fighting to get their hands on a free car - many of whom will not have even been considering buying one until they heard about this deal. Insurance, road tax, and licensing are not included, all of which will have to be paid when you get your shiny new Rover.
Don't get me wrong, West Brom's deal may be just what you are looking for - especially if you were about to buy a new car anyway. But do the maths before rushing in.
Fresh hopes for Equitable Lifers
Ruth Kelly's climb-down over Equitable Life this week will not be the last time she is humiliated on this case. Her admission that it will be possible to let the Parliamentary Ombudsman investigate the Government Actuary Department's involvement in the affair is certain to lead to further embarrassment for the Treasury.
Lord Penrose's report pinpointed the GAD as being at the heart of the regulatory failings which let the crisis at Equitable happen. Assuming that the Ombudsman, Ann Abraham, reopens her inquiry, which looks extremely likely, she will have to be blind or gagged to find no fault with the GAD and the Government as a whole. There is now a great hope that the Government will eventually be cornered into paying compensation to Equitable's long-suffering policyholders.
A body blow to the caring society
The news that long-term care insurance is to disappear withoutmaking it to old age itself is no great surprise. People don't like facing up to the fact that there's a good chance that they may end up in a care home. When you've got full use of your limbs and faculties, the idea seems far too horrible to bear thinking about.
But the Government should be concerned. People are not saving enough for their retirement, and in the future many will be forced to use the equity in their homes to supplement their pensions - a practice which is still relatively rare these days. For now, most people hang on to their homes, either to pass on to their relatives, or to pay for care fees if the need arises.
So in 50 years' time, when everyone is retiring on the capital in their property, where will the money come from to pay for those who need to go into care? One thing's for sure - the Government won't be able to afford it. And people won't be able to insure themselves against the potential liability, because long-term care insurance won't exist.
Already, the Government is running into serious problems trying to fund the growing number of care-home residents who don't have adequate resources. Very soon, this will become a problem which the Government will no longer be able to ignore.
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