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Borrowers have been urged to snap up attractive mortgage deals while they last, after the sudden collapse of Lehman Brothers, the fire-sale of Merrill Lynch, the bailout of the AIG by the Federal Reserve and the prospect of an emergency takeover of the UK lender HBOS raised fears that home loans will again dry up and the cost of those available will rocket.

The average cost of a two-year fixed-rate mortgage deal had been in decline for two months, dropping from 7.08 per cent in July to 6.39 per cent this month. The US Government-backed rescue of the mortgage giants Fannie Mae and Freddie Mac less than a fortnight ago added to confidence that an easing of the credit crunch was under way.

But the shock disintegration of Lehman, the US investment bank, and talks of an emergency takeover of HBOS by Lloyds TSB in particular, will worsen the mortgage drought in the UK as local lenders wait to see the extent of their losses - and those of other institutions with whom they do business. Melanie Bien, director of the mortgage broker Savills Private Finance, says: “Confidence in the financial markets has once again been shaken and if this continues, with more banking names dragged into it, this will discourage lenders from lending to one another, pushing up the cost of borrowing in the money markets. This could then lead to higher mortgage rates.”

But Michelle Slade, an analyst with Moneyfacts, says that it can take up to two weeks for the higher cost of bank borrowing to filter through to customers. Ray Boulger, of the mortgage broker Charcol, says that the delay in the fallout reaching the mortgage markets comes from UK lenders waiting to see if the “initial reaction to the news was the right one”. In the past week several lenders, including Cheltenham&Gloucester (which is owned by Lloyds TSB) and Abbey, have cut rates. There had been speculation that, with the UK economy slowing, pressure was building for cuts to official interest rates within months, but this week the Governor of the Bank of England, Mervyn King, predicted that inflation would hit 5 per cent, dashing hopes of any timely base-rate reduction.

Boulger advises: “A sensible precaution for those coming to the end of their mortgage deal in the next six months would be to consult a broker and look at getting a new deal, as a form of insurance.”

What the agents say

The Lehman collapse is yet more bad news that will add to the uncertainty in the market. However, a lot of people have been saying that we need to get some of the dirty laundry out to know where we stand - this is one big pile of dirty laundry. This event might finally persuade some vendors that times have changed: I'm talking about those who believe that their houses are still worth what they were a year ago and so refuse to drop their asking prices.

Peter Rollings, Marsh & Parsons

When we put out our forecast of falls of 25 per cent over two years, we made assumptions about job reductions in the City. The news about Lehman Brothers has brought many of these job losses forward and all at one time, but that doesn't alter our forecasts. Was it a surprise that something like this would occur during the course of the credit crunch?

Lucian Cook, Savills

We don't expect improvement in the economy any time soon. There will be little credit around for the foreseeable future, and property markets take years, not months, to unwind. There are three stages for sellers: indignation, resignation and capitulation. We are just reaching resignation.

Charlie Ellington, Property Vision

I don't think anyone would predict recovery this side of 2009 - or possibly even well into 2009. But I take the perverse view that we are getting some of the bad news out of the way, which will help eventually to bring round a recovery, even though there will be more repercussions over the next few weeks. Once the banks start trusting each other again, the lending rates between them will start to reduce and they will start to write more mortgages again. This can't go on for ever: they have to write mortgages because that's how they make money. But for those people in a position to get a loan, now and for the next six or nine months will be a good time to buy.

Robert Bartlett, Chesterton

If I could knock 15 per cent off the price of the properties on my list, I could sell them all by Christmas, but owners will not allow it. Many have simply put the shutters up and decided not to sell, or simply to rent their home out if they have already moved. They cannot come to terms with the fact that their house, which was worth £750,000 a year ago, may now achieve only £500,000. But they are in for a three-year wait until values recover. Buyers believe that prices will continue to fall and so are holding back - we reduced our database of those people looking for property last week from 950 to just 160 serious buyers.

Tim Blenkin, Blenkin & Co

We have sold 48 properties in Mayfair this year, at a total value of £225 million, compared with 136 at a total of £392million over the same period last year. Thirty per cent of properties for sale have price reductions and there are five potential repossessions in Mayfair this year, which is unheard of. The number of Mayfair estate agents has already dropped by 33 per cent since last year and we expect that more will close. The moving classes will return when there is more money in the banking system.

Peter Wetherell, Wetherell

There is an oversupply of properties to let - the numbers have doubled since last year. We are doing a lot more transactions than last year, but revenue is less as rents are falling. You can now rent a flat in Chelsea for £450 a week that would have cost £1,200 a week last year. This is because we rely on City boys - and they aren't there any more.

Ivor Dickinson, Douglas & Gordon

Article Courtesy of Judith Heywood @ The Times Online