Cheap deal? Check the small print

Lenders are always keen to tempt consumers in a market full of lookalike plans with incentives that make them think they have bought a mortgage on the cheap.

But apparent generosity does not suspend that basic law of economics - there is no such thing as a free lunch.

What they give with one hand, they can take back with another. The big difference is that the giving will be writ large while the taking away will be in the small print.

Banks and building societies often provide discounted mortgages at low interest rates for fixed periods. And some schemes come with a cashback. This means that money (usually a percentage of the property's value) is actually given to the borrower just for agreeing to take the loan. It resembles a discount except that you get the money upfront instead of having to wait for the savings to add up.

But such temptations often come with a sting. One potentially crippling cost is the redemption penalty that comes with many cashback or discount loans. This means a lender can charge you a percentage of the loan if you decide to move or seek an alternative package before completing a minimum period. This can be anything up to six years. Some loans have penalties that can extend well beyond the life of the deal's cheap rate portion.

Penalties can either be based on a number of months' interest at the non-discounted rate or on a percentage of the sum borrowed.

So, if the current rate of interest is 7.74% and the loan was for £100,000 with a 12 months' penalty, and you decided to leave after a year, you would end up having to hand over £7,740. Most redemption penalties fall as time goes by so if you cancel after one year you will face higher charges than pulling out after three. Abbey National is currently offering a 5% cashback with a five-year redemption penalty. Here, the cashback alone is reclaimed as the rate is the standard 7.74%.

Prudential Banking has a taper for its redemption penalties. Take out its discount package and you get 2.5% off in the first year, 1.5% discount in year two and 0.5% off in the third year.

But you are held in for six years unless you pay a penalty. Cancelling in the first year entails a fine of 5% of the sum borrowed, falling to 2.5% by the sixth year.

A discount sounds great but you had better make sure you intend to stay put. Parting with a few thousand pounds just for changing your mind is not a line the salespeople will use to tempt you.

Some financial advisers believe that redemption penalties give the borrower more loans to choose from, but the surfeit of deals on the market can be confusing - especially for a first-time buyer. And no matter how much lenders defend these schemes in the name of consumer choice, such variety can be misleading for many borrowers.

Not surprisingly, redemption penalties are popular with lenders because either way they are covered. If you decide to move before the agreed time you hand them over a hefty fee and if you don't they are still making a profit from your compulsory loyalty.

If there is no redemption penalty in the small print beware another potential trap. Some lenders oblige customers to take out their buildings and contents cover or other insurance policies. These will almost always be more expensive than shopping around.