There's Still Hope In The Mortgage Market

If you're about to take out a mortgage - or remortgage from your existing deal - don't panic. There are still some great deals around - and we've found them for you.

It's a scary time to be buying a home. As the credit crunch tightens its grip, lenders are protecting themselves by tightening their lending criteria - and mortgage products are dropping like flies.

But don't panic - there are still plenty of good deals on offer. I'm going to highlight some of the best, and help you work out which one is right for you.

What's been going on?

Here's a quick guide to what's going on in the housing market:

UK house prices are beginning to fall. According to the latest House Price Index from Halifax, prices fell by 2.5% in March - the biggest monthly fall since September 1992, when Britain was in the middle of a housing market crash.

Mortgage lending is slowing. Research by the Council of Mortgage Lenders indicates that there are 30% fewer loans offered for house purchases this year compared to last year.

Most lenders no longer provide 100%, deposit-free mortgage deals. Abbey - the last big bank which allowed borrowers to buy without a deposit - stopped offering these deals this week.

Only Bank of Ireland and Bristol & West (which are part of the same group) still offer 100% `First Start deals'. But even these come with a big caveat: your parents (or other close relatives) are held jointly responsible for the mortgage.

Cheap fixed-rate deals are being withdrawn. Last week, First Direct, the online arm of HSBC, withdrew all its mortgages for non-customers. The lender says this is a temporary measure due to `unprecedented demand'... but we'll see.

There are fewer long-term fixed rates around. On April 7th, Woolwich withdrew its two and ten-year fixed rates, as well as selected five-year fixed rate deals. 

Depressing stuff, isn't it? But don't despair. There are still some good deals out there if you know where to look. Here are my top tips on how to pick a mortgage deal - and which are the best deals to go for right now.

What sort of mortgage is best for you?

The right mortgage for you will very much depend on your individual circumstances. Here are the main options on offer:

A variable rate deal

This sort of deal might suit you if you have some flexibility in how much you can pay every month. There are two types of variable rate mortgages: trackers and discount rates.

A tracker will (as the name suggests!) track changes in the Bank of England Base Rate. So it will increase when the Base Rate increases, and decrease when the Base Rate falls.

And, as interest rates are expected to fall in the coming months, a tracker could be a good idea as it your monthly payments would then get smaller.

A discount rate mortgage offers you a set percentage discount off the lender's standard variable rate (SVR), usually around 2%. Often discounts appear cheaper than trackers, but do not be seduced by the rate alone. Lenders don't always drop their SVRs when the Base Rate falls, so you could lose out if you went for a discount over a tracker.  

Remember, whether you opt for a tracker or a discount rate, you need to be aware that if interest rates rise over the course of your mortgage deal, so will your monthly payments.

A fixed rate deal

In this case, your payments are fixed for the course of the deal, no matter what happens to interest rates.

This sort of deal is a very good idea for borrowers who are on a tight budget and need to know exactly how much they'll be paying each month.

The flip side is, if interest rates fall your payments won't fall with them!

Timescale

Should you opt for a two-year deal or tie yourself down for longer?

With the credit crunch looking like it's going to get worse before it gets better, prioritising long-term financial security over short-term flexibility could be a good strategy.

If you opt for a deal lasting the full lifetime of your mortgage, such as a lifetime tracker, this means you don't have to go through the hassle of periodically re-mortgaging (with all the fees that involves).

And if you opt for a long-term fixed rate deal, you'll have the security of knowing what your payments will be years in advance. However, you'll be tied in for a longer period of time - and if a better deal comes up, you won't be able to remortgage without incurring a hefty financial penalty (known as an Early Repayment Charge).

Listen to our podcast, Darling, Let's Fix The Mortgage For 25 Years, for more on this topic.

The best of what's left

Here are some of the best deals still on offer:

Source: The Motley Fool Mortgage Service 

I think HSBC's lifetime tracker is a good option if you're looking for competitiveness and flexibility. It combines a reasonable tracker rate with a relatively small fee of just £599 and, best of all, there's also no penalty if you do decide to remortgage early.  

If you had a £150,000 mortgage and went for this deal, your monthly payments would be £932.81.

Alternatively, if you're looking for a really low rate with short-term commitment, HSBC's two-year fixed deal may appeal. On a £150,000 mortgage, the monthly payments would be just £876.01. Just remember to factor in the high fee of £1,499, and bear in mind that in two years' time, the deal will come to an end and you'll have to shop around all over again.

Unfortunately, you will need at least a 10% deposit to take advantage of these deals. If your deposit isn't quite that big, you'll probably have to pay a higher rate - so it might well be worth waiting and saving up instead. Alternatively, a mortgage broker at The Fool can give you professional advice about the deals that are left.

Whatever deal you go for, keep a cool head, do your research thoroughly and you should still be able to find the right deal for you.

Good luck!

More: Halifax Axes More Mortgages | Buying Your First Home: A Complete Guide

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