Figures released by Moneyfacts show that the number of mortgage deals is continuing to shrink as lenders ration their home cash advance loans in favour of people who can put down larger deposits. According to the financial data company, the number of deals on offer has shrunk by 65% in the past year and by a quarter since the start of November.  

More than half the available home loans now require a deposit of 25% or more. And there are now just 15 deals available to those borrowers with a once-normal 5% deposit.  

The vast majority of products lost in the last month are as a result of the loss of so many base-rate tracker mortgages. A month ago there were 249 available, today there are just 45. With base rate falling to such low level, many lenders are choosing to severely restrict the number of trackers they offer or not offer them at all. 

The credit crisis has very quickly shrunk the ability of banks and building societies to lend money to home buyers. Just over a year ago, at the start of November 2007, there were 3,419 different mortgages available at deposit levels of 0%, 5%, 10%, 15%, 20%, 25% and 40%  

There were still 257 100% deals that did not require a deposit at all and most of the rest were available to borrowers who needed to put down only a 5% or 10% deposit.  

Now there are just 1,213 deals on offer, and more than 650 are reserved for people who must raise a down payment of 25% or 40%. The number of 10% deposit deals has increased recently though, to 151, as lenders revise their mortgage ranges.  

And ten are still available with no deposit at all, but these are highly restricted.  

The 0% deposit products are from Northern Bank, who only lend in Northern Ireland and Tipton & Coseley BS, who only lend in the Midlands and you need a guarantor to get their mortgages. To stave off the effects of the impending recession and cut borrowing costs for mortgages holders the Bank of England has in the past few months slashed its bank rate from 5% to just 2%.  

This has helped push down the interest charges on both existing and new mortgage deals. But with funds now limited, banks are still rationing their loans severely, mindful of the fact that house prices have fallen by about 14% in the past year and are widely expected to keep on dropping in 2009.  

A statement from Chase De Vere, the mortgage brokers, said that if the government wanted mortgage lending to revive, it would have to put pressure on lenders to accept smaller deposits.  

The problem is that the Bank of England can cut its base rate but it is not stopping lenders from increasing the deposits they require. The majority of big lenders will not lend above 80% of a property’s value. 

The downturn in mortgage lending has been so dramatic that some experts predict that if the trend continues hardly any new loans may be granted next year. This could lead to the novel and economically unfortunate situation of new lending being outstripped by mortgage redemptions as people pay off their loans.

The Financial Services Authority (FSA) has threatened mortgage lenders with large fines if they fail to give fair treatment to customers when dealing with arrears on home loans. Mortgage providers have been given a deadline of 31 January to prove that customers facing arrears or repossession are being treated fairly.  

The FSA has written to all chief executives of mortgage lenders and administrators telling them to review their arrears policies.  

An FSA statement says, “Conditions in the mortgage market are difficult and it seems likely that these conditions will persist for sometime. In such a challenging operating environment it is particularly important for senior management to ensure the fair treatment of customers.”  

Previous criticism of “weaknesses” in arrears and repossession policies led to a noisy response from the Council of Mortgage Lenders (CML) which was angry that all lenders were grouped together for criticism, saying that most lenders had well-structured policies.  

However, the CML was more supportive in its response to the latest deadline. “Lenders understand that in the current difficult economic environment there is bound to be a high level of scrutiny of their handling of mortgage arrears,” said their response statement. 

The Building Societies Association (BSA) has also welcomed the latest move. “With arrears forecast to increase over 2009, it is essential that all lenders ensure that their arrears and repossession policies treat customers fairly. Building societies want their borrowers to remain in their homes if they have repayment difficulties, and genuinely view repossession as a last resort.”  

The FSA has a set of rules regarding the treatment of mortgage customers who have fallen into arrears, although they are quite weak and non-prescriptive. They state that lenders should have a written policy that “reasonable” efforts are made for customers to be able to pay back arrears over time, that they are told about independent advice that is available, and that repossession is a last resort.  

The FSA letter tells chief executives to review these written policies and to assess whether customers are being treated fairly in practice. It threatens action against those lenders that flout the rules. This could include fines or, at worst, ban lenders from operating.  

The FSA has shown a willingness to hand out hefty fines during unrelated inquiries into the mis-selling of loan insurance. There are hopes that a same willingness with regards to repossession policies will ease the pressure on people having trouble making their mortgage payments.