Squeezed by the mortgage mangle

David McGregor of Largs was one of them. When the end of the 47-year-old operation manager's four-year fixed-rate mortgage of 4.49% was approaching, he asked his mortgage adviser to find a better deal than the 6.24% being offered at the time by his existing lender, the Halifax. But three different products from three different lenders were all withdrawn within days of him applying. On March 11, they submitted an application for Scottish Widow's tracker mortgage at 5.25%, although it came with a 2.5% arrangement fee because he was switching lenders.

"But I got anxious when I didn't hear anything back from them, and discovered that the reason was that the product had been withdrawn from the market the day after my application was submitted," he says. Because it had been applied for online, and processing had begun, Scottish Widows agreed to honour it. The jump in interest rate means David will pay an extra £115 a month on his £180,000 mortgage. The arrangement fee cost £2500. "But it's the best I could get,"

he says.

It was worse for Glasgow restaurateur James Green (not his real name), even though he began looking to remortgage months in advance of the end of his two-year fixed-rate mortgage of 4.59%. He discovered that the cheapest option was to embark on another two-year fixed rate of 5.64% with no fees if he stayed with Abbey, his existing lender. On his mortgage of £340,000 that 1.05% interest rate increase would mean paying an extra £300 a month.

But compared to what might have happened had he chosen to switch lenders - that's nothing. The next best deal offered this week was from the West Bromwich, whose relatively attractive two-year fixed rate of 4.89% came with a sting in the tail of a 2.5% arrangement fee. For James, that would have meant coughing up a one-off £8500. Next up was the Woolwich's 10-year deal at 5.29% plus a relatively gentle £995 arrangement fee. But that was only available because James had 60% still to pay on his mortgage - or, in other words, his home contained 40% equity.

But the mortgage mangle is by no means restricted to existing borrowers. It's squeezing everyone - with first-time buyers the hardest hit. The days of the turnaround mortgage have gone, as nervous lenders take more time to carry out credit searches on customers. Lloyds TSB, for example, is taking up to 28 days to process a first mortgage application. Veronica Conway, a 25-year-old police civilian from Kilsyth, was last week one of the last first-time buyers to be offered a 100% loan.

More lenders are demanding deposits of up to 20% of the purchase price. Yesterday the Halifax, Britain's biggest mortgage lender, announced new rates to reward customers with larger deposits. From Monday, it will reward customers who have at least a 25% deposit with a rate which is typically 0.1% lower than those who are borrowing a higher proportion of their property's value. The move is similar to that introduced earlier this year by the Nationwide, which offers the best rates to customers who have a 25% deposit.

"It's affecting everybody," says Janice McCready, a mortgage adviser with Which Mortgage Limited in Bearsden, Glasgow. "I'm having to tell first-time buyers with debt to come back when they've paid off their debt. Some remortgagers are being hit with higher repayments and horrendous arrangement fees."

Cat Barile, a 25-year-old trainee solicitor from Dundee, is in the unusual position of being offered an "in principle" mortgage of £104,000 from the NatWest, which would be 95% of her projected salary when she qualifies and begins her new job in Glasgow in August. "I've been told by my bank there's no way I'd get a better deal anywhere else," she said.

Cat is regarded as an existing customer by the NatWest because it gave her a £5000 graduate loan. The mortgage offer takes into account this and Cat's additional subsequent debt. She is lucky because her parents are helping her with the 5% deposit.

But she feels under pressure to find her first flat by August. Otherwise she faces an uncertain future. "It's very hard. I don't what kind of mortgage I'll be able to get by then," she said. "It used to be that professionals like me would be offered an automatic 110% mortgage but those days are gone, even though I'm what they call a safe bet'.

"I just wish I'd not gone to uni and had got a job straight from school instead, because I'd now have seven years of savings to put down on a deposit for a flat, and I wouldn't have my student debt. I've worked really hard for five years to get my degree, and as a trainee for two years, and I feel really disadvantaged. I'd have got a better mortgage if I didn't have any debt. It's very, very disheartening."

Meanwhile, the country's mortgage brokers are chasing their tails to keep up. McCready admits the last month has been a "nightmare".

"It's been like walking on sand because products are being withdrawn from one day to the next," she says. "The boot is firmly on the other foot as lenders try to reduce their risk and I can't believe how quickly things are changing. Criteria are being tightened up to take only the cream of the crop, the safe bets."

The buy-to-let market that has fuelled so much new development in places such as Glasgow Harbour is also affected, and many lenders are pulling out, while others are making it much more difficult for landlords to obtain a mortgage.

The Royal Bank of Scotland, for example, will only lend up to 75% of a property's value.

Even though the 40% capital gains tax landlords must pay on the increase in value of a property will be reduced to 18% from Monday, the slower market has made it more difficult for them to sell a property. Selling times have lengthened to 44 days from an average of 29 days this time last year.

"So those who are already landlords are probably best to sit tight," says Mark Horden of GSPC. He finds it "extremely ironic" that just at the time when new-build properties are less attractive to landlords and therefore more affordable for first-time buyers, the credit crisis means they are finding it difficult to get a mortgage.

"This is happening at a time when the market is unusually right for first-time buyers. It's very, very frustrating for them," he says.

Kenneth Low, chief economic forecaster at the Fraser of Allander Institute in Glasgow, does not believe the funds are not there to lend; rather, it's the risk management that is much tougher. "Funds are available but banks are concerned about taking on too much risk," he says. "They are saying they simply need to know the collateral of the prospective borrower, which is a prudent approach in the current conditions but is very tough on first-time buyers."

So what's the answer? "The way to get back to normal is to make more mortgage lending funds available," says Horden. "If the Bank of England doesn't accept more mortgage debt the lenders will lend less and less money. That will have a huge impact on the wide economy which will lead to a real economic crisis."

The Bank of England and mortgage lenders are currently locked in discussions about how to achieve this. Base interest rates are being cut on April 10 from 5.25% to 5%, but how much effect this will have on the market is debatable.

Mortgage lenders don't borrow from the Bank of England, but from other banks - who are insisting on higher interest rates because of the fall-out from Northern Rock. "Which is where Bank of England comes in," says Horden. "It must take some mortgage debt off lenders' hands to allow them to continue to lend."

Veronica Conway, who is single and lives with her parents, managed to squeeze in the door just as it was closing. She spotted the flat in Kilsyth that she wanted just five weeks ago, contacted her mortgage adviser and within 10 days had signed up for a 100% variable tracker mortgage at 6.29% with the Dunfermline building society. She gets the keys on Tuesday.

Dunfermline have since withdrawn their 100% mortgages. "I feel incredibly lucky because I got one of the last 100% mortgages on the market," said Veronica. "If I'd left it another week, I'd never have been able to get my flat and I'd still be living with my parents."

Predictions are that the mortgage mangle has a few more turns to take before things get better. "This is a time for everyone to catch up and take stock," says McCready. "It's a challenge, but it's also an opportunity for us all to get our collective house in order."

cate.devine@theherald.co.uk