By the end of the first three months of this year, when the base rate of interest had reached its lowest point in history of just 0.5 per cent, there was a rush of people looking to take out a fixed rate deal on their home owner loan, in order to lock into a cheap loan deal for when interest rates increased again, despite the fact that the majority of fixed rate loans were considerably more expensive than the equivalent variable rate or tracker loan.

This would have been a good move if interest rates had risen, but it now looks as though cheap loan interest rates are here to stay for some time to come and as a result of this, borrower’s ideas are shifting when it comes to choosing a new loan.

According to the latest figures form the home owner loan broker, John Charcoal, somewhere in the region of two thirds of all home owner loans taken out in September this year were on a variable rate, as fixed rate loan deals remain too expensive in comparison. This is a dramatic turn around from earlier in the year, when nearly 80 per cent of new loans were on a fixed rate basis.

Ray Boulger of John Charcoal said “Nothing has happened over the last few weeks to change our view that interest rates will remain low well into 2011 and last weeks GDP figures, showing that we are now in the longest recession since records began, supports this view. Consequently we have continued to advise the majority of our clients to take a variable rate mortgage, as the differential between fixed and variable rate pricing still means that fixed rates are discounting a quicker and larger rise in interest rates than looks likely.”

Although there has been a steady increase in the number of people applying for a new home owner loan or mortgage for house purchase over the course of the year so far, this has been more than compensated for by the decrease in activity in people remortgaging their homes in order to obtain a better deal on their loan.

The main reason for this decline in remortgage activity is due to the fact that lenders are not offering attractive loan deals which are able to compete with borrower’s existing home owner loan products which may be on their existing lender’s standard variable rate or on a tracker rate loan.

The Mortgage Advice Bureau, one of the country’s largest home owner loan brokers, has seen a dramatic decrease in the number of borrowers looking for a better deal on their existing home owner loan.

In September this year, remortgages made up just 28.9 per cent of the company’s overall loan deals, compared with 59.3 per cent over the same period twelve months ago. The number of remortgage applications has now fallen for 9 consecutive months and shows no signs of improvement while lending criteria remains as it currently is.

Brian Murphy of Mortgage Advice Bureau said “These latest figures show that lenders still remain extremely cautious with the best deals being largely focused on borrowers with significant deposits and/or equity. Many would be remortgage borrowers are unable to switch due to little or no equity in their properties.

As a consequence, many are reverting to their lenders standard variable rates, which in many cases currently offer good value. The dilemma for many will be, if and when interest rates do rise, the effect that those rises will have on their ability to service their mortgages if they are unable to remortgage to more attractive rates.”

Despite the recent economic slow down and recession pushing the Bank of England Base Rate of interest to its lowest ever level of 0.5 per cent, rates on home owner loans and mortgages steadily falling and the Government pumping billions of pounds worth of funding into UK banks in order to get them offering loans again, the average cost of a personal loan has continued to increase and is still doing so.

Apart from the increase in rates, it seems that the majority of lenders have tightened their lending criteria to the point where anyone with anything other than a perfect credit rating will not have to worry about the rate charged, because they are unlikely to be accepted in the first place.

With the much tightened lending criteria and higher interest rates on personal loans, it would appear that banks and other loan companies are adopting an attitude of “Once bitten, twice shy” when it comes to offering personal loans to customers. The average rate for a loan of £1,000 is now 19.7 per cent and this reduces gradually as the loan amount becomes greater, with a personal loan for £25,000 costing, on average, between 9.5 per cent and 10.0 per cent.

Michelle Slade of Moneyfacts.co.uk said “In the last six months alone, £335 has been added to the cost of the average £25,000 personal loan, taking the total increased cost for borrowers on a £25,000 personal loan since the crunch began to a staggering £1,804. Unemployment continues to rise and lenders are worried that an increased proportion of their customers will default on their loan.

It is highly likely that new customers are paying an increased premium to cover the defaulting customers who took out loans at the previously more competitive rates. The upward trend in rates looks set to continue. Anyone in need of a personal loan, really needs to ensure they do their homework to find the best deal possible or they will be left severely out of pocket.”

We reported recently on how the nationalised lender Northern Rock is planning to split the company into two bodies: a good bank containing the savings accounts and well managed home owner loans and mortgages and a bad bank which will take care of all the “toxic” debts such as home owner loans and personal loans with high arrears levels and defaults.

Now the Bradford and Bingley building society has announced that it intends to carry out a similar exercise in order to group together some of its better assets to attract potential buyers and help the lender to repay its government loan.

Bradford and Bingley was partly nationalised one year ago and received a loan from the government of £18.4 billion via the Financial Services Compensation Scheme (FSCS), to bail the company out of its financial difficulties, which were largely created by a high level of defaults and arrears on its buy to let loan book, along with other various badly managed loans and other debts.

Although the original Financial Services Compensation Scheme loan fee was paid by the government, the financial services industry is being forced to foot the eventual bill for the bail out and Bradford and Bingley are under pressure to repay the £18.4 billion loan as quickly as possible.

When Bradford and Bingley was originally bailed out with the loan, the Spanish bank Santander quickly bought up the savings book of the building society, worth around £20 billion which helped to reduce the amount of the original loan required. The assets of Bradford and Bingley are worth somewhere in the region of £50 billion and the lender is now attempting to package together the more attractive elements of its business, which other financial companies may be interested in buying and going some way to repaying its loan.

There has been further evidence that first time buyers are starting to return to the housing and home owner loan market, as new research from Unbiased.co.uk has shown that more than half (51 per cent) of all their enquiries during the month of September, came from first time buyers who were looking for an independent financial adviser or loan broker to help them find the home owner loan or mortgage they needed.

The next most popular area for advice was in the remortgage area, at just over a third, followed by buy to let loan enquiries reaching their highest point at 17 per cent of all enquiries.

It is a welcome sign that first time buyers are returning to the housing and home owner loan markets, as this sector provides the base for other areas of the market to move. It seems likely that many potential first time buyers have been waiting for house prices to reach their lowest point before buying, whilst using the time to save up a sufficient deposit to meet lenders’ strict criteria on loan to value levels and these factors, coupled with low interest rates and a range of new loan products aimed at first time buyers, makes it an ideal time for them to get on the housing ladder.

Karen Barrett of Unbiased.co.uk commented on the return of the first time buyer, but advised them to take advantage now, before regulation becomes even tighter on loans. She said “It appears many have been biding their time but now feel they are in a position to investigate what’s on the market and take the first steps by seeing a whole of market mortgage adviser to advise them on their mortgage options.

In light of the recent FSA proposals on a review of the mortgage market, there could be a future dip in enquiries from first time buyers as, with increased regulation, mortgage lending criteria could become even stricter.”