Avoid the mortgage crunch

Lenders are treading water until the FSA takes over regulation of the industry, warns Stephen Pritchard

Next month, the Financial Services Authority (FSA) takes over regulation of mortgages, in what is known as M Day. The promise is that home buyers will receive more consistent, and hopefully better, advice. But in the short term at least, the change appears to have led to more -expensive mortgages.

Mortgage industry experts talk of a short term "credit crunch" as lenders try to deter new business in the run-up to the changes. Some lenders might not yet have trained all their advisers; others might have concerns about whether IT systems, put in alongside the change, will work as planned. These worries seem to have prompted a number of banks and building societies to tread water in the mortgage market, rather than go all-out to bring in customers. In some cases, they are actively deterring new applications by dropping special deals, or hiking rates.

Among the most dramatic recent rate increases, Cheltenham & Gloucester has increased its two-year fixed rate from a relatively competitive 4.99 per cent to 5.49 per cent. Other lenders that have adjusted rates include Woolwich, Barclays and Abbey.

"Some lenders have deliberately set out an uncompetitive product range to make sure they get little business over the next few weeks," says Ray Boulger, senior technical manager at Charcol, the mortgage brokers. "They also want to make sure they are satisfied that they are geared up to all the new requirements."

Simon Jones, a director at mortgage brokers Savills Private Finance, agrees that lenders are "slowing the market down". Five-year, fixed-rate mortgages look especially poor value, when longer-term money market rates, known as swap rates, are falling.

The solution for home buyers might well be to wait. The M Day transition should be relatively short, perhaps just two to three weeks, and mortgage lenders, like other businesses, have to meet annual targets. To make up for time lost this month and next, banks and building societies might need to go aggressively after new business. "When lenders are fully up and running, there should be some aggressive pricing," says Jones. "We expect to see good deals by mid to late November."

That will be cold comfort, though, for buyers who need to draw down their mortgage now. Homeowners remortgaging can, to a great extent, choose their timing to suit the markets. Mortgage experts say that now is not a good time to be switching. Even homeowners who are coming to the end of a special deal, such as a fixed-rate mortgage, are probably better off paying the lender's follow-on standard rate before going back into the market towards the year's end.

Buyers, especially those in a chain, do not have this luxury. But rather than pay over the odds now for an uncompetitive mortgage, there are some strategies buyers can adopt to ensure a good rate. The first step is to talk to a mortgage broker or solicitor, to check exactly where they are in the buying process. If buyers are aiming to complete in the New Year, rather than now, they will almost certainly have time to make a new mortgage application for a better deal. At Charcol, Ray Boulger says that the broker tries to use valuers whose reports are acceptable to most lenders. If a buyer switches at least they will not have to pay for an additional valuation.

Buyers who want to move before Christmas have fewer options. One strategy is to pick a penalty free mortgage with a view to swapping it in a few months' time.

Boulger recommends that buyers who want a fixed-rate mortgage should pick a lender that is usually competitive in this area, such as the Nationwide. Take out a mortgage on the lender's standard variable rate - not normally an attractive option - and then the door will be open to move to a fixed or discounted mortgage when the market settles. Staying with the same lender minimises paperwork and fees for doing this.

A slightly riskier strategy is to opt for a plain-vanilla mortgage now, to ensure that the house purchase goes through, and then go back into the mortgage in late November or early December. Borrowers should also look for deals without a booking fee.

"If you can afford to wait, you will be fine," says Jones. "If not, the best solution might be to find a mortgage without penalties, that will let you look at it again in a few months' time."

Picking a mortgage on a standard variable or tracker rate does not guarantee that it has no penalties. Some lenders levy charges for buyers who pay off loans early, typically in the first two years. A broker will have access to the small print and might be the best way to find a suitable loan. Despite some lenders cutting back mortgages, there are some good deals, especially for larger loans. Charcol has good rates with Birmingham Midshires, whilst Savills Private Finance's Simon Jones says that Alliance and Leicester's rates are as good as they have ever been.