Credit crunch hits home for millions of Britons

Millions of British homeowners face sharply higher mortgage costs with big banks and regional building societies raising rates and tightening lending criteria as a global financial crisis feeds through to consumers

Some of Britain's leading lenders, including HBOS, Nationwide and Lloyds TSB, increased interest rates on their main products recently, continuing a trend among the big names in recent months.

Smaller lenders are also restricting lending and withdrawing products at an unprecedented rate. 

The message is clear: lenders want to scale back asset growth and only deal with the most credit worthy customers, in stark contrast to the relaxed lending in past years.

"The free availability of credit that we've seen for the past few years will all but disappear and that will be the pattern of the next two or three years," said Louise Cuming, head of mortgages at price comparison site, Moneysupermarket. 

"Lenders have quite openly admitted that they are looking to protect their margins rather than do volume lending, and we're seeing that in the pricing," she added. 

Hardest hit will be first-time buyers and 1.4 million borrowers coming off short-term fixed rate deals this year. 

But "quite a lot of pain and shock" will be felt more widely, according to Ray Boulger, technical manager of mortgage broker Charcol. He estimated between 2.75 million and three million homeowners will be coming off some sort of deal this year - whether fixed rate or tracker. 

Britain's major banks have said they will take a more cautious approach to lending this year as turmoil in wholesale markets results in higher funding costs, coupled with a cooling housing market and economy. 

The result has been a sharp drop in the number of offers available. Lenders have scrapped deals offering borrowers more than the cost of their homes; are charging a higher premium if borrowers have a small deposit; and are steering clear of customers with patchy credit histories.

More than 2,000 residential and buy-to-let mortgage products have been withdrawn recently, with the number of products on offer dropping to 5,700 from 7,726, according to personal finance information provider, Moneyfacts.

"These changes show that no one has escaped the effects of the credit crunch this time," Denise Harvey, Moneyfacts mortgage analyst, said in a report. "Whether you are a prospective first-time buyer or an existing borrower coming off a deal, there will certainly be less choice out there."

The big lenders are less prominent in ‘best buy’ tables, and smaller building societies have also retreated after being hit by overwhelming demand, Moneyfacts said.

Until investors return to buy mortgage backed securities or liquidity improves with more central bank action, there is unlikely to be much improvement in wholesale costs and in turn mortgage offers, analysts said.

Britons are also suffering in the fallout from the crisis at Northern Rock, which was taken under state control after needing emergency help last September.

The near collapse of Britain's fifth biggest lender damaged the credibility of UK regulation and may have contributed to higher funding costs now.

It also removed the most aggressive lender from the market. Northern Rock provided 19 percent of net mortgage lending in the first half of 2007, more than double its traditional share.

As Northern Rock was widely slammed for its model, hedge fund investor RAB Capital estimated the bank had saved borrowers about £5bn a year by driving down charges across the industry with its aggressive approach.