Think before you take the handout

INTEREST-FREE LOANS are not the only incentives developers are offering to potential purchasers, with car giveaways also popular.

In Wexford, Meadowcraft Developments is offering a car or home fittings worth €20,000 to the first three buyers who purchase houses at its development at Whiterock Hill.

Earlier this year, the developers of the Alderwood development at Hollystown, Dublin, offered to give purchasers a Volvo C30, valued at €25,000, with every sale. Prices started at €480,000 for a three-bed property.

While such incentives may well prove to be the carrot needed for some homebuyers to part with their money, it is worth comparing the cost of the incentives with the value of a similar reduction in the price of the property.

Take the Alderwood development, for example. If purchasers succeed in negotiating a €25,000 reduction in the cost of the property rather than accepting a new car, in addition to benefiting from a purchase price of €455,000, they would also save almost €23,000 in interest payments over the life of the loan - thereby almost doubling the value of the free-car deal.

Looked at another way, by accepting a free car, you could be paying almost twice as much for the pleasure of driving a new car - which you probably didn't need in any case.

At the Elm Park development in south Dublin, potential house- buyers are being offered interest- free loans of up to 30 per cent over five years on a purchase price of €470,000 for a two-bed apartment. While the scheme has its attractions, how does it compare to a price cut of half the loan amount - 15 per cent?

At a discount of 15 per cent, the new purchase price would be €399,500 and, in general, house- buyers will need a deposit of 10 per cent, or €39,950.

This would imply a mortgage of €359,550 and average monthly repayments of €2,018.98. The overall cost of the loan would be €367,284.20.

Under the 30 per cent interest- free loan scheme, an initial purchase price of €329,000 would imply a deposit of €32,900 and a mortgage of €296,100. For the first five years, this is more attractive as monthly repayments are just €1,662.69.

However, after five years, if the purchaser refinances to include the outstanding payment of €141,000, monthly repayments will shoot up and the overall cost of the loan over 30 years will be approximately €420,000 - almost 15 per cent more than if the homeowner had secured a 15 per cent discount on the purchase price.