Death Of The Cheap Mortgage Deal

Where have all the cheap mortgage deals gone? Donna Werbner explains how to beat the credit crunch.

"What is the cheapest mortgage deal available at the moment?"

If you are looking for a mortgage, this is probably the number one question on your lips. But what if the cheapest deal isn't very cheap? What if there aren't any good deals out there? What can you do then?

One of the UK's top 10 largest mortgage lenders, Alliance & Leicester (A&L), announced poor financial results last week. Other big lenders are also expected to announce bad results and of course, Britain's fifth largest lender - Northern Rock - has now been nationalised. All because of the `credit crunch'.

But so what? What difference does that actually make to you and me? How will it affect the pricing of mortgage deals?

The Simple Life

To answer this question, we have to step a few decades back in time. Back in the 1970s, life was relatively simple for mortgage borrowers.

After all, there was very little to distinguish one deal from another. Most building societies offered the same standard variable rate (SVR), and you were either eligible for it or you weren't. And many people (self-employed borrowers, buy-to-let investors, divorced women, gay couples) simply weren't, no matter what their income was. Even if you had a steady job, often, to be eligible, you had to save a set amount each month for a year, in order to `prove' to the bank manager at your building society that you could afford to pay back a mortgage.

Then the mortgage market was deregulated and banks came in, competing for customers. And everything changed. Rates began dropping dramatically, the amount of money lenders were prepared to hand over increased substantially and innovative types of deals began to be offered - for example, fixed rates, trackers and offset mortgages.

With more lenders in the market, competition for new customers rocketed. Instead of staying loyal to your mortgage lender for 25 years, you were expected - and encouraged - to switch every few years. Just one in five mortgage borrowers are now languishing on their lender's SVR (which is usually 2% higher than the most competitive two-year deal), with the vast majority remortgaging periodically to a new deal with a new lender. And the result of all this competition was that UK mortgage market became one of the most competitive in the world.

Until now.

Existing Customers Only

Following its dire annual results this week, A&L announced to the stock market that it is planning to "focus less" on attracting new customers in the coming year, and "concentrate more" on retaining existing customers.

What does this mean? What A&L is really saying here is that it is less willing to go to the lengths it did in the past to aggressively grab market share and, as a result, plans to offer fewer attractive rates to new customers over the next 12 months.

What about Northern Rock?

It is hard to predict what will happen to the troubled lender's mortgage deals once the nationalisation process is complete. But I, for one, fear that the Government will not have the balls to offer market-leading mortgage rates, because it would attract even more borrowers -- and that means lending even more taxpayers' money than the billions that are already on the table.

Of course I may be wrong: this could be just the strategy the Government takes to turn the Rock's fortunes around. But certainly the mortgage deals on offer at the moment from Northern Rock are currently extremely uncompetitive: rates, in some cases, are more than 1.5% higher than the rest of the market.

Here Today, Gone Tomorrow 

Since the pricing of mortgage deals is driven by competition, what will happen now that two of the biggest mortgage lenders in the UK are no longer trying their hardest to attract new customers?

We are already starting to find out. As my Foolish colleague Cliff D'Arcy revealed back in October, thousands of mortgage deals have been withdrawn since the credit crunch. This means it is becoming much harder for borrowers to find a great mortgage deal - and the further developments this week with A&L and Northern Rock are only likely to make it more difficult.

If you do find a stupendous mortgage deal (such as the seven I wrote about here last week), you have to be quick. In today's market, when a truly competitive deal does come along, it is often withdrawn almost immediately, because there is a sudden rush and the lender cannot service the volume of customers the deal attracts.

How To Bag A Bargain Rate

Bear in mind many mortgage offers are valid for three to six months, so it's worth shopping around for a deal a few months before your current deal comes to an end. If you keep your eye on the market by regularly checking the best buy tables, you'll be able to spot a cheap deal as soon as it's launched.

Alternatively, you could speak to a whole-of-market broker at The Motley Fool Mortgage Service, as they know exactly how long each deal has been available for and how likely it is to be withdrawn - so they can advise you whether you will need to move quickly or not. And most importantly, they'll also be able to push through your application at top speed, to ensure you get in there before it's too late and the deal is withdrawn.

There's no doubt that there are tough times ahead for borrowers who want a new mortgage this year. But don't lose all hope. Those competitive deals do still exist. They're just a lot harder to find than they used to be...

More: Seven Stupendous Mortgage Deals | Find A Marvellous Mortgage With The Fool