Making sense of the mortgage market has been even more confusing than usual over the past few months, as the credit crunch has seen lenders altering their rates and lending policies almost every week.
To make matters worse, house prices have been falling, leaving increasing numbers of homeowners concerned about the prospect of negative equity.
Whether you're new to the housing ladder or about to renegotiate the terms of your current home loan, deciding which mortgage to opt for – and securing the amount of money you need – is much tougher than it was six months ago. But if you look carefully, there are still some good deals to be found.
Fixed or Variable?
With the Bank of England base rate on its way down – cut by 0.25 percentage points in December, and forecast for another similar cut, possibly as early as next week – conventional wisdom would say that variable-rate deals should currently be the most attractive.
However, as the tough conditions in the credit markets have prevailed, the best rates in the variable mortgage market have been edging up, with the latest deals not nearly as competitive as borrowers are used to.
"The margins on tracker mortgages [which follow movements in the base rate] are under pressure," says David Hollingworth of fee-free mortgage broker London & Country. "So the rates for new borrowers on these are worsening. The best two-year trackers for new borrowers are now 0.1 per cent below the base rate. You don't have to go far back to remember when the best rates were 0.25 per cent or more below base. When you've got the base rate coming down, you would usually expect trackers to offer the best value, but at the moment, that's not necessarily the case."
The best value for borrowers at the moment is to be found in the fixed-rate mortgage market, with several lenders offering two-year deals at below 5 per cent – some 0.5 percentage points below the current base rate. Hollingworth points to deals from First Direct, which is currently offering a fixed rate of just 4.75 per cent for two years, but subject to a relatively large £1,498 fee. Alternatively, for those looking for lower upfront costs, the same lender offers a rate of 5.25 per cent, with a fee of just £99.
If you do find a fixed-rate deal you like, you may need to act quickly to secure it. Ray Boulger of the independent mortgage broker Charcol, says some lenders have been introducing competitive deals, only to withdraw them a few days later.
"It's not because they can't refinance them," he explains. "What's increasingly an issue is service. So at one end you've got lenders with very little funding, who are taking on just a little amount of business to show they're still around, and then you've got those who do have money to lend but can't cope with the number of applications when they do offer a good deal. So they've been withdrawing them to protect their levels of service."
Once you've found a deal that you like the look of, the next hurdle is persuading the lender to take add you to their books. The credit crunch has left lenders much more wary of taking on bad credit risks, so if you've not got a squeaky clean credit record, you may find it harder to get a loan than you once did.
However, Boulger says that for all but the worst credit risks, mortgages are still available – even at relatively high levels, proportionate to the value of your property (loan to value).
"A few lenders have pulled out of the 100 per cent and 95 per cent LTV mortgage market," he says, "and of those left in, the rates are now that much higher. But they're still available."
Last week, Abbey ratcheted up the rate on its 100 per cent mortgage by more than 1 percentage point, to over 7 per cent. However, it stopped short of withdrawing the product altogether.
With house prices falling, it makes good sense to have a deposit if you're a first-time buyer. Without one, you'll be much more exposed to the dangers of negative equity. Melanie Bien, of independent mortgage broker Savills Private Finance, says even those who are remortgaging may find it makes sense to plough some extra capital into their property. "Borrowers requiring relatively low LTVs – 80 per cent or below – will get the best remortgage rates, so if you have spare cash in savings, it may be worth using this to pay off a chunk of your mortgage," she says. "But make sure you don't use money that you might need at a later date."
Fees and freebies
Getting your head around the complex web of fees and costs is the other complication that borrowers need to tackle before deciding which mortgage deal to go for. Bien says it's important to look at the total cost of your deal over the whole period for which you're tied in. While a big upfront arrangement fee may initially seem unattractive, it could still work out cheaper, depending on the size of your loan.
"Check the total cost – rates plus fees – before making a decision," she says. "Many remortgage deals come with free valuations and legal fees which will keep the costs down – so it's important to bear these in mind."
Valuations, which are compulsory, and legal work, will typically set you back at least £500 when you're remortgaging, so if these are not included in your package, you should add this amount to the arrangement fee, to get a clearer picture of upfront costs. If you're buying a property, rather than remortgaging, there's also stamp duty to take into account.
London & Country (0800 953 0304) and Charcol (0800 358 5560) both offer fee-free mortgage advice over the phone.