We have detected that mortgage lenders are increasingly turning to the well tried marketing technique of “carrot and stick” to attract borrowers and persuade them to remain loyal.

The technique involves offering a mouth-wateringly cheap initial rate of interest and then encouraging the borrower to stay on beyond the introductory period by imposing punitive penalties if the borrower redeems the mortgage within a set number of years.

Take the Portman Building Society for example. It’s offering borrowers an interest rate of just 1.95% fixed for two years – but thereafter, you must stay with the Society for a further four years paying base rate plus 1.99%. This currently works out at 6.49%. If you want to move before the end of the sixth year there are swinging penalties ranging from 7% to 2% depending on when you make the move. This means that a borrower with a £125,000 repayment mortgage over 25 years would start off paying just £530 per month based on the current base rate. Then after the initial two year introductory offer, monthly payments rise to £854. That’s a rise of 62%.

If you prefer an interest only mortgage (see yesterday’s Blog), then the payment hike after the introductory period, is even more savage. Payments rocket by 233% from £203 to £676 per month.

But it seems that the vast majority of borrowers choose to stick with these sorts of deal. According to a spokesman from the Portman, these mortgages suit borrowers who want to defer the full cost of a mortgage for a few years and 90% stay loyal after the fixed rate ends. We think that simply means that 90% of borrowers can’t face paying the swinging penalties!

If you think you’ll find these hikes too much to stomach, you should consider the best of the two year deals without extended penalties. Take a look at the Yorkshire Building Society – they currently offer a 4.38% deal and you can move without a fee.

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