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Do incentives from banks really make their products the best?

I'm going to look at just a few of the ways banks throw money at us to grab our interest. Do these benefits really turn a product into a best-buy, or do these gimmicks just grab some headlines? 

Get £500 to take out a mortgage

We'll start with a recent incentive to take out a mortgage. 

Borrow to fund a home purchase through Halifax and you'll get £500 to help with moving costs. 

This is a hell of a lot of money that shouldn't to be sniffed at. However, you have to consider the whole package. Here are some of Halifax's two-year fixed deals: 

Halifax's two-year fixed-rate deals

LTV stands for “loan-to-value”, e.g. an 85% LTV means you're paying a deposit of 15%. On a £100,000 mortgage, that means you're borrowing £85,000 and putting down a deposit of £15,000. 

Halifax says there's “no fee” on these mortgages, but it does actually charge a £265 fee, plus valuation fees on top. You'll face all the usual related costs of moving too, such as legal fees and stamp duty. 

Even taking into account the £500 helping hand, Halifax's mortgages are not the cheapest. 

Looking at all disclosed costs, free related services and cashback on a £140,000 property, I estimate you'd save perhaps £200 more over two years if you went with Hanley Building Society's equivalent 80% LTV mortgage. You'd save £600 with Yorkshire Building Society's 85% LTV mortgage and a whopping £4,000 over two years with Hanley Building Society's 10% LTV mortgage. 

£100 for switching current accounts

Customers highly rate online bank first direct for its smooth service. This is despite it being an internet offshoot of high-street bank HSBC and, therefore, being potentially exposed to all the usual banking tricks that relieve you of your money. 

In addition to the top service, first direct bribes you with £100 to join. It'll even pay you another £100 if you leave after six months. That's how sure it is you'll be satisfied. 

This doesn't beat the Halifax Reward Current Account in the long run, which pays an ongoing £60 per year (£5 per month), compared to no credit interest from first direct. Halifax doesn't have such a great reputation for service though. 

It doesn't even beat Santander's 123 cashback current account, which I reckon might pay the average person between £30 and £40 per year, after annual charges. I wrote more on that in The most rewarding current account. 

You have to pay in £1,000 per month to get the monthly £5 Halifax reward and £500 per month to be entitled to cashback with Santander. With the first direct account you have to pay in £1,500 per month, maintain an average balance of £1,500 or hold selected additional first direct products, or you'll have to pay £10 per month to maintain your account. 

There are not many people like me who are willing to take 20 minutes to swap their current accounts every year or two to get introductory offers and beat the banks at their own game. 

If you're looking for consistent fair treatment, Co-op Bank, and Nationwide Building Society, Yorkshire Building Society and other building societies, have a good reputation for treating customers fairly. If you're looking for outstanding customer service, the new Metro Bank seems to be the place to go, although it still has very few branches that are all in the London area. 

Free petrol if you borrow

Halifax is also offering incentives to take out a personal loan. It's giving away £100 towards petrol costs to each customer who takes out a loan to buy a car. 

It's not a bad idea. Halifax attracts people making an investment in a new car, maybe for work purposes, rather than attracting serial borrowers who merely want to roll up all their credit cards into one easy loan to allow them to max out their credit cards again. 

But does the petrol money, which is provided on a pre-paid fuel card, make Halifax's deal better than the rest? 

£7,500 loan over five years

Halifax's car loan is available to existing customers only, who will end up paying around £800 more interest than for the market-leading five-year, £7,500 loan. In that context, the £100-worth of petrol doesn't sound so fantastic now.

Just half of accepted applicants will get the above rates and the rest will probably – if the industry is true to form – be offered significantly higher rates. 

The total interest cost in the table is just an estimate. If you start your repayments later than one month after you receive the loan, you might pay up to a few hundred pounds extra due to accumulated interest. 

In another sign Halifax is beginning to turn away from the industry's crazy, irresponsible lending of the 90s and noughties, its loans are restricted to existing customers only, which means it can better assess whether you're able to pay, and what interest rate you should be offered. 

However, revealing the gimmick for what it is, Halifax offers a cheaper loan of 8.8% with no pre-paid fuel card. On a five-year, £7,500 loan, this comes to around £200 less, which means you're better off if you buy your car using Halifax's bog-standard loan at the advertised rate, rather than the loan with the petrol gimmick targeting car buyers only.

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