One could argue that in taking out a contractor mortgage, safety should be the number one priority. So a five year fixed rate would be the best way to go….or would it?

The question remains as to whether or not there is another way that would best suit borrowers in the current market. Or to put that another way, is it possible to take out a lower rate mortgage deal and still come out on top?

Due to their high interest rates it could be assumed that five year fixed rate contractor mortgages would not be so appealing. However, recent surveys show that this is not the case. In fact, one in four borrowers would now choose this type of mortgage over a variable rate product.

One of the reasons behind this could be due to five year fixed plans experiencing a recent fall in interest rates. This in turn has brought about the idea that now might be the right time to take advantage of fixed rate deals.

4.5 % seems to be around where most good fixed rates reside, with First Direct mortgage propping up many best buy tables. However, this still remains more expensive than two-year fixed or tracker mortgages that offer rates of around 3% and fewer than 2.5% respecttively. Yet there are those who believe that there will be a rise in interest rates after the election and that now is a good to to fix.

Thus, no one can really be 100% sure as to which way the market will turn, due to the fact that mortgage interest rates are so unpredictable. There is much speculation right now that rates are at the lowest that they can go. If that is the case, then people who opt for a two-year deal now will find themselves on the receiving end of higher rates and more expensive monthly payments when it runs out.

So what can a borrower do to try and come out on top? Well if extensive research into borrowing plans and trying to predict the rise and fall of interest rates do not seem appealing, there is always the option of choosing a cheaper plan and banking the money saved.

Instead of taking out that expensive five-year mortgage, borrowers can invest in a two year fixed rate product, saving on average around £125 a month. Provided they save the difference, even if rates do rise, they should have a healthy war chest to combat the need to remortgage. And if rates do not rise, they have just saved up a large amount of cash. A total win, win situation some may say.

There is still also the option of taking out an offset mortgage. This way, borrowers simply put the money saved into a linked savings account. In this instance, they have the balance of the savings account subtracted from their mortgage amount and instead of receiving interest on this cash; they only pay interest on the balance.

But it must be remembered that in both circumstances fees would have to be paid for remortgaging. This has to be kept in mind, as each individual has to determine whether the higher rate or the amount in fees would be easier on their pocket.

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Image: Juggling On The Altiplano by Andy Hares

The upcoming general election will dampen the housing market, and the demand for contractor mortgages, according to experts.

A spokesman from an independent estate agent said that many sellers are waiting for the housing market to improve before putting their home up for sale. But if you follow the economic law of supply and demand, people should be putting their house on the market now when demand is high and supply is low.

Three quarters of a million houses are currently on the market but February sales were less than 10% (74,000) of that figure. That’s half the peak level that was reached in mid 2007.

This low sales figure can in part be attributed to the lack of available credit. In February, contractor mortgage approvals fell to a 9 month low and only 47,094 home loans granted across the whole of the UK.

Experts believe that many potential buyers are waiting to see the outcome of the election before committing themselves to a house purchase. The worst result for the market would be a hung parliament as this would create instability in an already fragile sector.

The stamp duty exemption for first-time buyers could help boost sales and it is thought that the Bank of England may keep interest rates the same for the remainder of this year.

The UK needs more new housing as levels have fallen to their lowest point in over 60 years. But if we get a hung parliament, we will have a further period of uncertainty until another election is held.

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Image: Stand in the Rain by Alyssa L. Miller

The lack of recovery in the housing market in the UK is having a knock-on effect on developers and members of the RCIS.

For the 7th consecutive quarter members of the Royal Institute of Chartered Surveyors have seen a decline in their workloads whilst housing developers are reluctant to build new homes that nobody will buy. The Glenigan Index, which measures the value of new private home construction, reports a drop of 20% last year.

According to Steve Turner from the Home Builders Federation, the market needs to make more contractor mortgage funds available to let people purchase residential property. He believes that until this happens, the housing market will remain sluggish.

And it looks like the situation is set to get even worse in 2011 when banks and building societies have to begin repayments on loans they received from the government in 2007 and 2008. This will lead to more stringent credit criteria according to Moodys, the credit-rating agency.

It was hard enough to get a contractor mortgage last year as lender’s approvals dropped by 2.3m to a mere 1.3m. Although lobbyists have been calling on the Bank of England to further delay the repayment timetable, the Bank of England Governor, Mervyn King has confirmed that it will go ahead as scheduled. Banks and Building Societies will then have until April 2014 to repay a total of £319bn borrowed from the government’s emergency state schemes.

Prior to the credit crisis, UK lenders could raise money through the wholesale markets and in the year before the crunch they raised £130bn through those channels. But in the past 2 years they have only been able to raise £11.5bn according to figures from the Council of Mortgage Lenders.

Many Building Societies will be hit hard by this as they have already had their credit ratings cut. In fact, only the Nationwide now has the ability to look to the wholesale markets. Additionally building societies lost deposits of £7.6bn in 2009.

None of this spells good news for anyone hoping to sell their property, or get a foot on the mortgage ladder, over the next few years as economists and credit experts believe house prices will slump and contractor mortgages will be made available.

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Image: Going No Where! by bixentro