In the past 12 months the mortgage market has undergone breathtaking changes. A year that began with an abundance of competitive deals has ended with a mortgage drought of epic proportions.

Lending has collapsed and the remaining deals from the biggest banks and building societies require huge deposits and spotless credit histories, blocking thousands of borrowers from the property market.

Hopes are high that the recapitalisation of the banks with taxpayers' cash and the liquidity offered by the Bank of England could help to improve the mortgage market next year. Times Money has spoken to lenders, brokers and economists to find out what the experts predict for 2009.

Lenders

Mortgage lenders remain cautious and believe that it is unlikely that the problems with wholesale funding will improve in the first half of the year. They agree that the Bank of England is likely to cut the base rate to 1 per cent, or even 0 per cent, in the year ahead.

However, the Council of Mortgage Lenders has given warning that its members may not pass on future cuts to customers on standard variable rates (SVRs). Borrowers with tracker mortgages will benefit from lower rates automatically, provided that their loans do not have a “collar” - a clause that prevents the rate from dropping below a certain level.

Some lenders, such as Nationwide, the UK's biggest building society, have said that they will have to continue to apply any further cuts in borrowing rates to savings rates, which are already low.

Lenders believe that two-year swap rates, which determine the cost of fixed-rate mortgages, have now fallen as far as they are likely to go. The current best-buy two-year fix is from Abbey, at 4.49 per cent. It is available to borrowers with a 25 per cent deposit and carries a fee of £495.

The brokers

Despite being hit by the decline in mortgage activity this year, brokers are optimistic that the figures will improve in 2009. Like the lenders, many brokers expect the base rate to fall to 1 per cent, or lower.

Melanie Bien, of Savills Private Finance, says that this will raise interesting questions for borrowers on tracker deals that are pegged below the base rate. For example, in August last year Cheltenham & Gloucester offered a two-year tracker pegged at 1.01 percentage points below base.

She says: “Homeowners on tracker deals that are priced at a margin below the base rate could face a situation of negative interest, where their bank could effectively have to pay the borrower for having a mortgage.”

Ms Bien predicts that lenders could offer deals that allow higher loan-to-value (LTV) percentages by bringing back an updated version of mortgage indemnity guarantees (MIG). In effect, this will mean that homebuyers will be able to borrow a greater proportion of the cost of a property but will also have to pay for insurance to protect against the threat of negative equity.

Ray Boulger, of John Charcol, another broker, argues that tracker mortgages will continue to be popular, particularly those that have a drop-lock option, which allows borrowers to switch to a fixed rate during the period of their deal.

He believes that fixed-rate home loans should become cheaper in the first half of next year. He says: “During most of 2009 the bank rate will be about 1 per cent and fixed rates will become progressively cheaper. There is likely to be a once-in-a-lifetime chance in 2009 or 2010 to switch into a cheap long-term fixed rate.”

But David Hollingworth, of London & Country Mortgages, says that it is unlikely that rates will fall by much because of the lack of wholesale funding available to lenders. He argues that homeowners are also likely to find it harder to find a cheap mortgage deal as LTV ratios continue to rise as house prices fall.

For example, a homeowner with a £50,000 mortgage on a £100,000 property has an LTV ratio of 50 per cent. But if the home falls in value to £75,000, the LTV ratio rises to 66 per cent. Lenders will continue to charge a premium to customers who need to borrow at a higher LTV ratio.

Mr Hollingworth suggests that existing borrowers should overpay on their mortgage if possible. He adds: “Homeowners should also start looking around for their next deal sooner rather than later. You can book a deal up to six months ahead.”

Economists

Simon Ward, an economist at New Star Asset Management, predicts that the base rate will be cut by half a percentage point in February, but says that it is unlikely to fall much farther. However, Hetal Mehta, of the Ernst & Young ITEM Club, the independent economic forecaster, argues that a further one-point cut is likely.

A Treasury report released last month by Sir James Crosby, the former chief executive of HBOS, gave warning that the slump in mortgage lending next year would mean that lenders actually collected more in repayments than they released in lending to new customers.

He argued that the Government could boost the mortgage market by promising to guarantee mortgage-backed securities, which banks issued to fund new mortgage lending before the credit crunch. Last year the market for mortgage-backed securities provided the funds for about 70 per cent of all mortgage lending.

Ms Mehta says: “Mortgage-backed securities were a cornerstone of the market and the Crosby recommendations need to be implemented quickly. The Government is unlikely to announce any progress until the Budget in March, but once it has approval from the EU there should be a considerable improvement in the availability of new mortgages.”

Price check

House prices fell by about 15 per cent in the past year, according to the Halifax house price index. The average price of a home was £163,605 last month, compared with £195,000 a year ago.

Property values are widely tipped to continue falling over the next 12 months, although at a much slower pace. Lloyds TSB, the UK's fifth-biggest mortgage lender, forecasts that prices will fall by a further 10 per cent before they level off in the second half of the year and begin to rise in 2010.

Rightmove, the property website, also predicts a 10 per cent fall next year. It reported that it will be the “year of the bargain”, as sellers accept offers that are far below asking prices.

Ray Boulger, of John Charcol, the mortgage broker, says: “Buyers who have waited for the right time to pick up a bargain will be tempted into the market, causing prices to bottom out by the middle of the year.”

Some economists are less optimistic. Roger Bootle, of Capital Economics, the consultancy, recently predicted a 35 per cent drop in house prices by 2010.

CASE STUDY: Savings of £500 a month

Michele Gurney, of Poole, Dorset,is coming to the end of a two-year mortgage deal with Cheltenham & Gloucester, fixed at 4.95 per cent. It expires at the end of February, when Mrs Gurney will remortgage to a Northern Rock two-year tracker pegged at 1.49 percentage points above the base rate. The £505,000 home loan, which equates to 71 per cent of the value of her three-bedroom detached home, comes with a fee of £1,995.

Mrs Gurney, whose husband, Richard, is an airline pilot, contacted London & Country Mortgages, the broker, at the end of November, after becoming worried that interest rates on new mortgages were creeping up despite the base-rate cuts imposed by the Bank of England.

The couple were able to secure the deal only hours before it was pulled by Northern Rock. “I am so glad that we grabbed the offer before it was withdrawn,” Mrs Gurney says. “I was really surprised that I could secure such a fantastic deal and then put it on hold for three months.”

The Gurneys will save about £500 a month in repayments and plan to use the extra cash to pay off more of the mortgage.