Mortgage Brain’s latest product analysis shows there are now 87% more available mortgage products than there were this time last year.

As of the 5th of December, its contractor mortgage sourcing system listed 14,052 home loans. At the same point in 2010, only 7,519 mortgages were available.

Throughout the first ten months of the year the number of new products coming to market increased steadily to give the best yearly performance for more than three years.

During the past year, the number of variable rate mortgages has increased by 120% and now stands at 2,329. Tracker mortgages increased by 108% and fixed rate home loans went up by 72%. There are now 8,294 fixed rate mortgages on the market, accounting for almost 60% of the total products.

Mortgage Brain’s CEO, Mark Lofthouse, said this was a great way to end the year. 6,500 new products have become available this year and good increases have been seen in all product types. Mortgage intermediaries now have a much greater variety to choose from and plenty more opportunities to find the best product for the ever-changing needs of their customers.

Meanwhile, the Co-op has reduced the rates on its fixed rate mortgages by up to 0.60%. An 85% LTV 2 year fix now comes with an interest rate of 3.79%, whilst a 90% LTV 3 year fix now comes in at 4.89%. Both of these deals attract a £999 fee.

The biggest decrease is on a five year fixed rate mortgage for buyers with a 10% deposit. This deal can now be snapped up at 5.39% with no fee.

The Co-op’s head of mortgages, James Hillon, said mortgage lending companies are increasing mortgage rates because of the Eurozone crisis, but the Co-op intends to buck the trend to encourage activity in the housing market.

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Two year fixed rate contractor mortgages have proved very popular in recent years, but are they necessarily the best option?

Although a two-year fix gives homebuyers the security of knowing what their monthly repayments will be over the short-term, what happens when the term comes to an end?

Interest rates have held steady at 0.5% for well over two years now and experts predict that they will remain low, at least well into next year. But, the same experts predict that rates could start increasing sharply in about two years time. Therefore, people who take out a fixed rate or tracker mortgage now could be in for a nasty shock when their two-year term comes to an end.

The Leek United Building Society is currently offering a 75% LTV discounted variable rate of 2.49% for two years, and the Yorkshire Building Society has a 75% LTV two year fix at 2.69%. Both of these deals attract fees of £495.

These mortgages sound good, but when you look behind the headline rate, the Leek United deal reverts to the Building Society’s standard variable rate of 5.19% at term. If interest rates rise, the SVR will also increase and so will your monthly repayments.

Mortgage lending institutions are starting to come out with some reasonable deals for longer-term mortgages. First Direct has a lifetime 75% tracker mortgage at a variable 2.89% rate. This is a fully flexible home loan and could be switched to a fixed rate mortgage without penalty if interest rates start to increase dramatically.

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Last week HSBC launched a new contractor mortgage for first time buyers. The High Street bank says this is the only first timer home loan charging less than 4%. Furthermore, HSBC says it plans to make an additional £350 million available to buyers with small deposits before the turn of the year.

This new HSBC offering is available to borrowers who can put down between 10% and 15% as a deposit, and charges a respectable 3.84% over a two-year term. This is slightly lower than the bank’s standard variable rate, which is currently 3.94%. As an added bonus, this mortgage does not attract any set up or application fees.

Once the two-year term ends, people will automatically move to the bank’s SVR. With interest rates as they are at the moment, this is no big deal, but in two years time, rates are likely to have increased and borrowers could find themselves paying more than they bargained for.

Peter Dockar, the head of mortgages at HSBC, explained that the bank recognises the need to help first time buyers and so it offers great rates, no fee options and an in-branch mortgage advice service to help buyers get the home loan that best fits their requirements.

Also last week, HSBC warned that the reforms proposed by the Independent Commission on Banking could cost it up to £1.3 billion.

Some experts think the bank might move its HQ away from the UK if the proposed reforms go ahead. HSBC transferred its HQ to the UK from Hong Kong 20 years ago, after it tool over the Midland Bank.

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The Coventry Building Society has become the latest in the long line of mortgage lending institutions to add new products to its range of buy to let and residential mortgages.

Several of the new contractor mortgages come with no early repayment charges or arrangement fees.

Residential customers can now apply for a 65% LTV two year fixed rate mortgage at 3.05%. This is one of the deals that does not have an arrangement fee. For people with less money to put down as a deposit, the Coventry is now offering an 80% LTV two-year fix at 3.55%. Again borrowers would not have to pay an arrangement fee for this deal.

The lender has also launched its Flexx BBR Tracker mortgages for the buy to let market. The rate tracks the Bank of England base rate plus 2.99%. With the base rate still at its historic low of 0.5%, landlords taking advantage of this deal now would pay a modest 3.49%. Interestingly, Coventry has capped the rate until the end of 2013 at a top level of 4.49% to protect borrowers from dramatic increases in the base rate.

The deal is available to property investors with a deposit of at least 35% and there are no penalties for early repayment.

Colin Franklin, Coventry’s sales and marketing director, explained that many homeowners are currently on a standard variable rate mortgage with an interest rate of between 3% and 4%. This new range gives them the option to remortgage and pay a lower fixed rate.

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Contractor mortgage holders, who are currently on their lenders’ standard variable rate, may be wondering whether it would be a good idea to remortgage and switch to a different product.

Before the global financial crisis in 2008, a standard variable rate home loan tended to cost more than a fixed rate or tracker mortgage. However, times have changed and now borrowers on SVR are paying about £2,600 less a year than they were on their introductory rate.

Fixed rate and tracker loans are also at their cheapest level for 20 years and this has led a lot of borrowers to question whether or not they should pre-empt an interest rate rise and fix their repayments now.

Market experts currently predict that the base rate will increase to just under 1% by the end of next year and 2% by the end of 2014. Based on these predictions, the CML says that by the end of 2012, 85% of those who have reverted to variable rates will still be paying out less every month than when they took out their original mortgage.

Of course mortgage rates do differ considerably by lender. Moneyfacts says the average SVR now stands at 4.8%, whilst data from Defaqto shows that the average two-year fix costs only 3.52%. The average three-year fixed rate mortgage comes in at 4% and a five-year fix attracts an average 4.22%.

Interest rates tend to be higher for people who can only put down small deposit payments, but those who can afford a 25% deposit have the pick of some great deals at present.

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People with negative equity, or just a small amount of equity, can have problems remortgaging when their introductory contractor mortgage deal comes to an end.

A lot of them will opt to stay on their lender’s standard variable rate. Some, such as those with the Nationwide or Cheltenham and Gloucester Building Societies, will not see their mortgage repayments increase significantly as both mortgage lending institutions have an SVR of 2.5%.

However, a lot of other lenders, especially the smaller building societies, did not reduce their variable rates when interest rates came down. Some of these now have an SVR in excess of 6%. Their customers would then be in for a massive hike in monthly repayments once their current fixed rate or tracker mortgage deal comes to an end.

Some lenders do have special deals for home buyers who find themselves in negative equity. Halifax has a 120% LTV two year fix at 4.49%, plus a £999 fee. The Yorkshire Building Society also has a two year fix, this time at 5.49% for mortgages above 100% LTV. That deal does not attract a fee. And the Coventry Building Society has a mortgage fixed until June 2015 at 5.99% on loans above 100% LTV. Again there is no fee but it is only available to existing customers.

Lloyds has an Equity Support Scheme which enables customers who are moving home to “port” their current mortgage to their new property, so they can stay in negative equity, but it does not provide further funding.

There are also some institutions that provide 95% LTV deals for people with low equity. The Skipton Building Society for example has a 5.99% two year fix plus a £195 fee.

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Contractor mortgage holders breathed a sigh of relief again last week as the Bank of England kept the base rate at its historic low of 0.5% for yet another month. However, the BoE will eventually have to raise interest rates and consumers could be in for a shock when that happens.

The National Institute of Economic and Social Research claims that a 0.5% increase in the base rate could cost mortgage holders an extra £516 per year. Households have seen their disposable income decline over the past couple of years so any interest rate rise could have a disastrous effect on household budgets.

People with variable rate and tracker mortgages would be the first to feel the effects of any increase. Fixed rate mortgage holders at least have the security of knowing how much they need to pay throughout the term of the loan.

Meanwhile, mortgage lending institutions in Scotland have to abide by a different set of rules than those in place in the other UK countries when it comes to repossessions.

The Scottish parliament recently decided that lenders must continue to serve a calling-up notice on mortgage defaulters before they can repossess a property. After a calling-up notice has been served, the lender must wait for two months before they can begin repossession proceedings in court.

Kennedy Foster from the CML, expressed his disappointment that the Scottish parliament has decided not to reverse this ruling despite the majority of respondents to a recent consultation supporting a reversal. The Scottish Law Commission will now review this area but that might not happen for a couple of years and in the meantime, both borrowers and lenders will face extensive delays and higher costs.

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Mortgage lending companies in the UK continue to compete for customers by lowering the rates on their contractor mortgage products.

Barclays Bank recently cut the interest rates on 30% of its Woolwich brand of tracker mortgages and fixed rate deals. The high street bank has also made changes to its Great Escape package and increased the LTV to 85% so that people can take advantage of the deal with a lower deposit. An added bonus with the Great Escape mortgage is there are no application fees to pay.

Barclays’ head of mortgages, Andy Gray, said the bank was encouraging people to review their current mortgage now as it is not known for how much longer the Bank of England can retain the historically low base rate. He pointed out that the latest deals from Barclays enable borrowers to lock into a great rate and protect themselves from future increases.

Gray cited the example of a borrower with a standard variable rate 4.69% mortgage of £150,000 switching to the bank’s new two year fix. This would save the home owner about £5,400 he said, and this is a saving well worth having when household budgets are tight.

Barclays is not the only lender changing their mortgage products to serve their clients better. Significant cost savings can be obtained from many of the fixed rate mortgage deals currently available. In fact fixed rate mortgages are now at their lowest rate since 2007.

Recent data from the CML suggests that 65% of borrowers are now opting for a fix, compared to less than 25% choosing a tracker mortgage. 12 months ago, less than 50% of mortgage hunters went for a fixed rate deal.

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Which? money recently released data showing that most UK contractor mortgage lenders act independently from the Bank of England when it comes to setting the interest rates on their loans.

The survey discovered that just over 5% of lenders keep rates in line with the BoE base rate whereas 20% have increased their standard variable rate, despite the base rate remaining at 0.5%. Building societies seem to be the worst offenders even though their main aim is to look after the interests of members.

It appears from the survey results that consumers are not benefiting from the historically low base rate. We already have a situation where homeowners are struggling to make ends meet, so what will happen when interest rates rise?

Millions of people have a variable rate mortgage and will therefore see their monthly repayments go up when the base rate increases. Can mortgage lenders really justify passing on the full amount of an increase when they didn’t adjust their rates downwards?

Meanwhile, recent data from the Financial Services Authority shows that fewer households are behind with their mortgage repayments. Some experts see this as a sign that the housing market is starting to stabilize.

In the first quarter of this year, around 335,000 people were behind with their mortgage payments compared to 343,000 in Q4 last year. Furthermore, the number of mortgage payments going into arrears has dropped by 10% compared to the final quarter of 2010.

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Mortgage lenders are once again hoping to entice homebuyers into purchasing short-term fixed rate products. Northern Rock and Santander are leading the charge having reduced the interest rates on their two and three year fixes.

A first time buyer taking out an 85% LTV 2 year fix with Santander will pay 4.64% plus an arrangement fee of £995. People with a 20% deposit will pay 3.99% for a two year fixed rate contractor mortgage, plus the £995 fee.

Northern Rock has come up with a 70% fixed rate product at 2.99%, whilst its Everyday two-year 75% LTV mortgage is available at 3.19% plus £995 fee. This product is also available without the fee at the higher rate of 3.66%.

But are these deals as good as they look? Short-term fixes do offer some security, but only for a limited time.
Ray Boulger from John Charcoal, says clients may be better off going for a variable rate mortgage rather than a short-term fix. That way they get the benefit of the very low initial rates.

Flexible mortgages are also starting to gain traction. Northern Rock recently introduced a Freedom to Fix product which tracks at 2.08% above the base rate but allows borrowers to change to a fixed rate deal with penalties.

It pays to keep your eyes open when you’re looking for a new home loan as some products have extremely short shelf lives. Abbey recently had a good deal through mortgage brokers for a 75% LTV home loan at 2.89%, plus £995 fee, but it was only available for seven days.

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People are reluctant to commit to a new contractor mortgage deal when their current arrangement expires because of continuing uncertainty over interest rates.

If the base rate remains at its historically low 0.5% for a few more months, then a tracker mortgage or a variable rate deal looks good. But once rates start to increase, which they have to do eventually, then a fixed rate deal may well become appealing.

Remortgaging activity has been sluggish in recent months, but mortgage lending institutions are increasingly offering products with greater flexibility in the hope of tempting home buyers to take put a new deal.

In October last year, Barclays launched a “Switch and Fix” deal under its Woolwich brand. This allows customer to start off with a low tracker rate deal now, but gives them the option of changing to a fixed rate mortgage later without the fear of early repayment penalties.

In the last three weeks, both the Yorkshire and Coventry Building Societies have followed suit and launched their won similar products.

The Yorkshire Building Society has launched two new tracker mortgages at 2.29% and 2.49% variable, rates which are lower than any of the other SVR mortgages currently on the market. As long as the Bank of England base rate remains low, customers can remain with their tracker, but as soon as rates start to increase, they can move to a fixed rate mortgage for no charge.

The Coventry Building Society’s new offerings are called “Flexx for term”. These are unique products in that you can switch to any other mortgage product rather than just to a fixed rate deal.

Although the MPC decided to keep interest rates low when they met last week, people know this will change and these new flexible deals may soon start to increase in popularity.

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In May 2008, there were a total of 125 fixed rate mortgages with terms of 10 years or more. Now, there are just three.

The previous government suggested that home buyers should be encouraged to choose really long-term fixed rate deals. Nationwide, for example, launched a 90% LTV 25 year fix in 2007. The interest rate on that deal was 6.39%. In the same year, Cheshire Building Society launched a 10 year fix at 5.99%.

However, takers of these deals are living to regret their decision. If they had opted for a two year fix at 5.5% on an average £150,000 contractor mortgage they would have saved £83 a month compared to the Nationwide deal. And after the two year fixed term, the loan would have reverted to the standard variable rate of 2.5%. At 6.39%, a £150,000 mortgage would be costing the buyer £1,002 a month over 25 years. At 2.5%, the payment is just £678 a month.

If you do the maths, the 25 year fixed rate loan would cost a total of £300,600, whilst the 2 year fix plus 23 years at 2.5% SVR would set you back a mere £209,184 – £91,416 less! OK, so the SVR will rise once the Bank of England increases the base rate, but it will take an awful lot of increases before the 25 year fix looked like a good deal.

These 25 year fixes also attract high early repayment charges and this might put some people off remortgaging. The charges are usually about 3% which means that after 3 years it would cost you £4,200 to break out of the £150,000 mortgage. However, it could still be worthwhile contacting an independent adviser to discuss your options.

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