the mortgage crisis deepens

Consumers looking for a mortgage are facing less choice and higher rates. The Bank of England has warned that the situation is likely to get worse before it gets better and that the squeeze on mortgages is likely to continue for the next few months at least.

What's happening and what are the implications for those needing a home loan?

In the starkest sign yet of how the liquidity crisis is restricting banks and building societies' ability to lend, First Direct announced last week that it was temporarily pulling out of the mortgage market and for the foreseeable future would lend only to existing customers.

Having had some of the best mortgage deals available for the last few months the bank, which is owned by HSBC, said it needed to cease offering home loans to all but existing customers so that it could clear a backlog of applications and reduce the volume of business coming in.

Many lenders, including the largest players in the market - Halifax, Nationwide and Abbey - have hiked the rates on many of their deals recently to such an extent that they no longer look competitive, effectively pricing themselves out of the market. Woolwich, Barclays' mortgage arm, has just increased the rates on its lifetime trackers by up to 0.7 percentage points.

Other lenders including Co-operative Bank, Skipton and Derbyshire building societies have pulled some of their mortgage products, while Cheltenham & Gloucester has increased the size of the minimum deposit it requires for loans above £1million, from 10% to 20%.

The number of mortgage products available has plummeted from around 15,500 last July to around 5,300 now. With many lenders pricing their products at uncompetitive levels, the few deals that are keenly priced are attracting huge swathes of money and consequently aren't staying around for long.

There's no need to panic

Louise Cuming, head of mortgage services at moneysupermarket.com, said: "It's getting very difficult out there because as leading rates are pulled, the lenders offering the next best deals know that their products will be propelled into the best buy tables and that this will result in a huge influx of applications. If they don't want, or can't cope, with that level of business they too are having to re-price their mortgage products.

"However, there are still some lenders who do want to pull in new business, so it's not all bad news. While the choice is narrowing there are competitive rates to be had, for those with a good-sized deposit."

Many lenders have stopped offering loans above 90% of the property's value and the best deals require a deposit of at least 10%.

What are the best deals?

If you are moving house or buying for the first time, HSBC is offering a two-year fixed rate at 4.99%. This is available for mortgages up to 90%, although the fee is high at £1,499. This deal is only available direct through the bank - you cannot get it through mortgage brokers.

For those needing to remortgage, Woolwich has a three-year fix at 5.29%. The arrangement fee on this deal is £995, but it does include a free valuation and free legal work. A deposit of at least 40% is required.

If you would prefer longer-term security, the best five-year fix is from Derbyshire at 5.48%, while Woolwich has a 10-year fixed rate at 5.29%. The Derbyshire deal is one the few deals currently available up to 95% of the property's value. The arrangement fee is £999 although it does not include any freebies for those remortgaging.

Woolwich's 10-year fix has a £995 fee and includes a free valuation and free legal work for those remortgaging. However, it is only available for loans up to 60%.

Because of the worsening economic conditions, further interest rate cuts seem likely. A poll of economists carried out by Reuters found that 48 out of the 63 surveyed think the Bank of England will reduce interest rates next week. You may therefore prefer to opt for a variable, rather than a fixed rate mortgage.

HSBC has a two-year discount at 5.19%. The fee is £999 and those remortgaging receive a free valuation and free legal work. However, it is worth noting that this is a discount, rather than a tracker - the rate is linked to HSBC's standard variable rate and not the Bank rate. Consequently, any changes are at the lender's discretion and there is no guarantee that reductions in Bank rate will be passed on in full.

If you would prefer a tracker, Britannia has an attractive lifetime tracker at 5.9% - 0.65 points above Bank rate. The arrangement fee is £399. This product is also highly flexible as there is no early redemption charge so you can redeem the loan at any time.