Will Nick Clegg clog up mortgage market?

Deputy PM's wish to tinker with £80bn lending scheme could dash home-buyers' hopes

Just as mortgage lenders are finally showing an appetite for cutting rates and easing credit restrictions, up pops Deputy Prime Minister Nick Clegg to potentially spoil the fun.

Mr Clegg has called for the Bank of England's £80bn Funding for Lending scheme (FLS), which has given the banks confidence to lend out to mortgage borrowers, to be skewed away from homeowners and towards business.

"Diverting the bulk of FLS credit towards small and medium enterprises would be rather a travesty for the mortgage market. It will force lenders to rely on traditional sources of mortgage funding, all painfully constrained at the moment. The net result will be fewer mortgages, less high loan-to-value (LTV) lending and higher rates," says Richard Sexton, the director of chartered surveyors e.surv.

So far the scheme has helped push down mortgage rates to record lows, and although house purchase lending has actually fallen for the past two months, without the FLS this could have been much worse. There are now more mortgage products than a year ago, and many of them are considerably cheaper.

Charlotte Nelson of financial comparison site Moneyfacts.co.uk says the average two-year fix at 95 per cent LTV which was 6.03 per cent in August 2012 has now fallen to 5.31 per cent, while at 60 per cent LTV the rates have fallen from 4.47 per cent to 3.59 per cent.

Borrowers may still be excluded if they have any question marks hanging over their credit or income profile. However, many lenders have been making the most of cheaper funds offered under the FLS on the proviso that they increase their loan books. As a result, there has finally been a noticeable increase in high LTV mortgages, a welcome relief to struggling first-time buyers that have been locked out of the market.

"After a slow start, FLS has finally got the banks lending again, and at competitive rates, initially at the lower LTV end of the market, but now at the higher end as they seek bigger margins," says Ashley Brown of independent mortgage broker Moneysprite.

"If this cheap source of money for lenders is taken away, there is every chance they'll abandon first timers and retreat back to the safer, bigger deposit borrowers. The mortgage industry will be sweating right now".

If improvements in the mortgage arena are going to slow back down, the crucial question for borrowers is whether to plump for a decent fixed rate while they can.

Two of the best buys today include two-year fixes from Chelsea Building Society, one at 1.74 per cent up to 60 per cent LTV and another at 3.69 per cent up to 90 per cent LTV, although both have a £1,695 arrangement fee. In the five-year market, Yorkshire BS charges 2.64 per cent up to 60 per cent LTV with a £1,345 fee, while the unusual fee-free fix from Harley Economic is 4.20 per cent for borrowers who can only manage a 10 per cent deposit.

"Borrowers shouldn't panic, but equally take nothing for granted. If you need to remortgage and qualify for an excellent fixed rate that suits your circumstances, then why not take it?" says Mark Harris, the chief executive of mortgage broker SPF Private Clients.

The big sell with fixed rate mortgages is peace of mind – you know what your monthly mortgage repayments will be and can rest assured that they won't suddenly soar if interest rates head north – but they still have dangers.

First, rates could move down even further leaving you stuck on an uncompetitive deal for years. Also, while headline interest rates may seem attractive, some lenders have simultaneously been increasing their fees which could mask how competitive these offers really are. The total cost of the mortgage is the most important calculation, and if a home loan comes with high upfront fees it may not be the best deal for you.

If it is security you're after, a longer fix of five years could make more sense, and you won't be shelling out for another hefty arrangement fee in two years. If you prefer flexibility, a penalty-free tracker deal lets you move on to a fix at a later date without fees. An offset mortgage (which sets your savings against your mortgage debt) is also worth looking into.

At the very least consider whether you can increase your equity by paying down some of your mortgage with your savings. This will improve your LTV and your chances of remortgaging to a decent deal.