What's so special about special deals?

Just when the lot of the first-time buyer couldn't become any more confusing, the mortgage provider presents them with at least three options for a homeloan. Is it to be a fixed, variable or tracker rate?

The question seems innocuous but, upon closer consideration, the client will realise that the consequences of their decision may last longer than they like. Fixing for three years at 4 per cent may seem cheap now but what if, mid-way through, interest rates fall and you are stuck on an expensive repayment plan?

While such a scenario seems unlikely (interest rates look to be on the rise for the next couple of years), the unforeseen can muddy the waters. Recall the September 11th attacks and their disastrous consequences for the global economy. If the attacks hadn't happened, the economic picture would have been more positive and interest rates would by now have been higher than they are to reflect that. Conclusion? Predicting interest rates is impossible.

Added to this mix in the Irish market are lenders offering cheap "deals" on one-year fixes to new borrowers. This lures in new business, especially as new mortgage-holders are likely to remain loyal customers for 20 years. Recently, however, this practice of generating business around special offers has attracted criticism.

In the UK, a government-sponsored review of the mortgage market found that new-customer discounts (some lenders offer both fixed and variable deals) can lead to an unfair and opaque system that does consumers no favours. This is because, according to the report, many new borrowers zone in on repayments for the first, discounted, year without taking heed of how the cost of the loan will rise in year two.

The Irish industry argues that the findings bear less relevance for our market as the spread between discounted and regular rates is lower here. The findings are nonetheless worthy of consideration for anybody about to embark on a mortgage-funded house purchase.

Peter Bastable of mortgage broker, Simply Mortgages, says that the typical new-business discount offered in the Republic is about 0.8 of a percentage point. Thus, if the one-year fix to existing customers is 3.5 per cent, the same product for a new client is 2.7 per cent.

Mr Bastable says that "no one lender consistently owns this space", so it's worth shopping around. For example, Permanent TSB's one-year fix for existing customers is 3.6 per cent while for new customers it's 2.54 per cent. Bank of Ireland's existing customer rate is 3.5 per cent and new-business rate 2.75 per cent.

Mr Bastable says that most of his first-time buyer clients will choose the one-year discounted fix, while more mature customers are opting for trackers. This latter choice may reflect the fact that, in the case of some lenders, it may not be possible to move into a tracker (seen by most neutral commentators as the best product on the market) when the first-year deal has ended.

One Irish lender that recently abandoned the business of offering cheaper deals to new customers altogether is EBS, which is now offering the cheapest standard variable rate on the market to any of its clients that want to take up the option. The move came, according to the EBS, on the back of "resentment" by existing customers who felt new borrowers were getting cheaper loans at their expense.