How to escape the mortgage famine

Getting a home loan keeps getting tougher. But there are still some good deals out there, if you search hard enough. Sam Dunn offers an up-to-the-minute guide
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The Independent Online

In common parlance, "safe as houses" used to mean unshakeable confidence, security and – to put it bluntly – a one-way bet. Today's man on the street – particularly if heading home to long-rented accommodation or a house caught in the grip of negative equity – might, use the phrase in a rather less generous light.

The British housing market, once perceived as the closest to a sure thing thanks to a decade of rising prices and easy gains, now guarantees something of a very different sort: nervy uncertainty. Home-buyers and sellers face a febrile future in the slipstream of a debilitating recession, with the Bank of England's base rate at 0.5 per cent for months on end. Last week, there was a renewed erosion of confidence as the Royal Institution of Chartered Surveyors revealed higher numbers of estate agents expecting property prices to creep down. Halifax also compounded the gloom by posting a 3.6 per cent monthly slide in prices for September. The price of the average home in Britain plummeted £6,000 in barely 30 days to nudge £162,100, it said.

Set against a bleak economic landscape, a tough slog lies ahead for many, warns Howard Archer, chief economist at the City analyst Global Insight. "High unemployment, muted wage growth, an increasing fiscal squeeze, low consumer confidence and difficulties in securing a mortgage make for a poor combination of factors for house prices," he says.

For first-time buyers – who act as the lifeblood of the market as their purchases allow existing owners to trade up and move on – homeownership can appear a mirage. A report last week from the insurer Genworth Financial underlined how first-timers are effectively being washed away: the number of home loans worth 90 per cent of a property's value – the typical amount borrowed by a first-time buyer – slowed from a torrent in 2006 to a trickle in 2009. Mortgages taken out by people with only a 10 per cent deposit fell 90 per cent, from 245,000 in 2006 to just 28,000 in 2009.

But it isn't just first-timers who are struggling. Figures published by the Council of Mortgage Lenders (CML) show that new mortgage approvals are at their lowest levels in ten years and that existing homeowners are finding it tricky to remortgage to a new loan. Remortgaging is at its lowest level since 2000. Banks and building societies have tightened their conditions for lending during the past few years, afraid that rising unemployment and financial problems will lead to higher defaults on mortgages. It means that thousands of remortgaging homeowners who don't have enough equity in their properties must slide on to their lender's standard variable rate, which is usually more expensive.

"Borrowers across the board now need larger deposits and sound credit histories before lenders will even take a look at them," says David Hollingworth of the mortgage broker London & Country. "A great number of first-time buyers, especially those who don't have any financial help from their family, are effectively being priced out of the market until they are well into their mid-30s."

The sticking point for first-timers remains the size of the deposit or, for many trying to remortgage, the amount of equity tied up in their home. Until early 2008, a potential buyer could in many cases borrow 100 per cent of their new home's price or, if not, almost count on being able to grab 95 per cent of its value. Today, however, lenders are largely unwilling even to glance at an application unless you have at least 10 per cent of the asking price – and preferably 25 per cent.

The consequences of this are clear: last year, four out of five first-time buyers below the age of 30 had to ask their parents for assistance before they could clamber on to the property ladder. This has raised concerns, as home-buying threatens to become less affordable for poorer parts of society.

With the market sluggish in many parts of the Midlands and the North – if more resilient in London and the South-east – the overall picture is not easy to see. Prices remain buoyant – and are rising – in highly desirable parts of the country and in the capital. Yet they continue to stagnate in other areas, particularly for city-centre new-builds whose prices crashed in 2008 in cities such as Leeds and Manchester.

Amid all the confusion, plenty of buyers want the answer to the age-old question "Should I buy?" according to Melanie Bien at the broker Private Finance.

"With a property purchase you need to bear two key points in mind," she said. "Firstly, can I find a property I want to buy and would be happy in? Secondly, can I afford it and get the necessary finance? If the answer to both of these is 'yes', then the answer remains to go ahead and buy. Negotiate hard on the price you sell and buy for, and plan to stay in the property for a few years to ride out any ups and downs in the market."

Given the economic climate and wave of public-sector cuts predicted to bite hard during the coming months, finding the right home loan to suit you will be more critical than ever. Here's our guide to making the most of the mortgage market and grabbing the best deal for you.

Mortgage type: A fixed rate for two, three, five or 10 years

Who is it best suited for? Anyone who wants to set their monthly payments in stone in order better to budget – a favourite with first-time buyers

How does it work? Simply decide how long you want to fix your monthly repayments for and hunt the cheapest deal open to you.

Its selling point is the fixed monthly sum, meaning you won't have to worry when Bank of England base rate moves up.

The downside is, of course, that if base rate stays at 0.5 per cent, a tracker may work out cheaper; however, for those who don't want to take risks like this, a fix is the easiest option.

Bank of England figures show the average cost of a two-year fixed mortgage is 3.79 per cent and a typical five-year deal carries a rate of 5.06 per cent. Figures from Moneyfacts suggest more than half of new mortgages are fixed rate deals, compared to less than a third that are trackers.

Best deals for two-year fixed rate are with 75 per cent loan to value (LTV), by Principality building society (BS) at 2.74 per cent, (£1,499 fee) and with 90 per cent LTV, Yorkshire BS, 4.99 per cent, (£995 fee).

Mortgage type: Tracker

Who is it best suited for? Borrowers prepared to gamble on base-rate movements; if you can plan financially to cope with base rate rises, it could be for you.

How does it work? Your mortgage rate is pinned at a percentage point above or below the Bank of England base rate and moves in line with it. A typical tracker rate might be an initial 1.49 per cent plus base rate for two years, and then slide to your lender's standard variable rate (SVR) for the remainder of your mortgage.

Stiff competition for new customers meant tracker rates hit a record low last month: the average rate on a tracker deal dropped from 3.57 per cent to 3.55 per cent, the lowest level since records began in 1997.

Best deals: With 65 per cent LTV, First Direct – 1.69 per cent above Bank of England base rate for two years giving pay rate of 2.19 per cent, (£99 fee). With 90 per cent LTV, Post Office – 4.19 per cent above base for two years giving a pay rate of 4.69 per cent, (£995 fee).

Mortgage type: A 'switch 'n' fix' or 'drop lock'

Who is it best suited for? Borrowers wanting a cheap tracker with an escape route if rates rise swiftly.

How does it work? It allows you to take out a tracker loan on your home but then quickly jump to a fixed-rate deal with the same lender without incurring any early repayment charges. The appeal is clear: a speedy exit from a rising tracker if base rate begins to soar. You don't usually have to pay a fee to switch, either, although expect to pay the usual "arrangement" fee.

Best deals: For a drop lock with 60 per cent LTV, Royal Bank of Scotland, 1.69 per cent above base for two years giving a pay rate of 2.19 per cent, (£999 fee). With 85 per cent LTV, Nationwide, 3.44 per cent above base for two years giving a pay rate of 3.94 per cent, (£995 fee).

Mortgage type: Offset

Who is it best suited for? Those with hefty savings.

How does it work? If you have more than £20,000, keep it with your mortgage lender to "offset" against your home loan and pay interest only on the difference between the two. Say you have a £150,000 home loan and £40,000 savings: an offset sees you shell out interest on £110,000 only. On a 25-year loan at 3.75 per cent, you would save £44,919 and clear your mortgage nearly five years early.

With today's low savings rates, you'll save much more in mortgage interest than could be earned in a tax-free cash individual savings account (ISA), says Defaqto.

Best deals: With 60 per cent LTV, Yorkshire BS offers a two-year fix at 3.09 per cent (£995 fee). With 90 per cent LTV, Yorkshire BS offers a two-year fix at 5.09 per cent to 90 per cent LTV, (£995 fee).

Mortgage type: Repayment versus interest only

Which should you go for? Repayment, unless you've a huge chunk of equity (at least 25 per cent) in your property.

What are the benefits? By repaying the actual capital value of your home as well as the interest, you'll own the property outright at the end of your mortgage term.

Pick interest-only instead and, while your payments will be considerably lower, you'll need to save a monthly sum separately in order to pay for your home at the mortgage's end. You'll need a lot of equity or a big deposit to qualify for interest-only loans, and give proof to lenders that you're saving money into an alternative investment.

Lenders are very wary of interest-only as, when house prices fall, the lack of capital repayment means such borrowers' overall outstanding debt is greater.