Lloyds Banking Group attracted criticism last week after it inadvertently revealed that one of its lowest advertised mortgage rates is intended as "a conversation starter" rather than a popular deal.
The controversy centres on a 2.99% two-year fixed rate mortgage deal that was launched by Lloyds Banking Group company Halifax in September and by Lloyds TSB on 1st October. The low interest rate is heavily publicised in branches, but thanks to the deal's high deposit requirement (40 per cent of property value) and a virtually prohibitive 2.5 per cent arrangement fee, Lloyds concedes that the deal really "isn't suitable for everyone".
Lloyds' intentions came to light when a letter intended for branch staff went public. In it, the banking group advises staff to start a conversation with potential mortgage customers along the lines of "we have a great range of fixed-range mortgages starting from as low as 2.99 per cent".
The first problem is that so few customers will qualify. Less than a quarter of borrowers will meet the product's maximum 60 per cent loan to value requirement.
The second problem is that even fewer of those will want to pay the high arrangement fee for the benefit of two years' fixed low interest. For somebody applying for the average mortgage amount of around £110,000 in August 2009, the fee of 2.5 per cent of the mortgage advance comes to £2,750.
Even if you're buying the average house (around £160,000) and have to raise just half of the purchase price through a mortgage (i.e. £80,000), that fee would still amount to an eye-watering £2,000.
No wonder Lloyds staff in practice end up steering applicants towards other products. At the same loan to value level, customers could opt to pay only 0.2% more interest with a £995 fee on a 2-year tracker.
Their spokesman defended the principle of issuing deals purely as eye candy, saying: "As a relationship-focused bank it is natural for our colleagues to want to discuss with our customers the range of products available to them".
However, we can't see many borrowers getting drawn too far into that sort of conversation when, for example, a stroll around the corner to a branch of Northern rock would reveal a fixed-rate deal for purchasers that would cost them an extra 0.76% in interest but with a fee of £595.
What do you think – is Lloyds clever to introduce rates mainly for eye candy, or is that a bit cynical?