Bank crisis hits home loans

Lenders are tightening the terms on which they will lend to "risky" borrowers as a direct result of the turmoil in the money markets.

It comes as the Citizens Advice service said it had seen a "worrying" 35 per cent leap in the number of borrowers coming to its offices for help with mortgage arrears.

Soaring inflation today added to the squeeze. Official figures showed inflation rose from 2.2 per cent in January to a nine-month high of 2.5 per cent last month after householders were hit by gas and electricity rises and more expensive food.

With mortgages becoming harder to get, first-time buyers are being told to find 25 per cent deposits to secure the best rates.

Many of the 100 per cent mortgages previously on offer have been withdrawn and huge deposits are being demanded for the most attractive rates.

Nationwide, one of the biggest lenders, has raised its minimum deposit for its best deals from 10 per cent to 25 per cent. That means buyers looking for a typical £250,000 firsttime property have seen the deposit they need to find rise from £25,000 to £62,500 - an extra £37,500. In total, around 6,000 of the 12,000 mortgage deals on offer in the market a few months ago have already been taken off the market.

Lenders are reserving their best deals for the lowest risk borrowers, typically those who have built up huge amounts of equity in their homes or have substantial deposits.

The chaos in the markets has forced short-term interest rates in the London money markets up to six per cent compared with the Bank of England's rate of 5.25 per cent. That means banks and building societies are unable to pass on cuts to customers.

The US central bank, the Federal Reserve, is expected to slash interest rates today to help boost confidence in the American economy.

Pressure is mounting on the Bank of England to follow suit. But with inflation rising sharply, and above target for a fifth month in a row, it is limited in what it can do.

Households have been hit by increases in gas and electricity tariffs from all but one of the six main suppliers this year. A rise in beer and cigarettes also had an upward effect on inflation last month while cheese, milk and bread prices rose by 17.6 per cent on an annual basis - the largest rise since records began in 1997.

Ongoing surges in the cost of oil - which has soared to record highs of $112 a barrel - have added to the pressure on inflation. George Buckley, chief UK economist at Deutsche Bank, said: "I don't think the Bank of England is going to cut rates in April. I think we're going to move in May."

Around three million borrowers are due to refinance cheap fixedterm loans this year, many with interest rates well below five per cent. Many borrowers will have to accept deals at least a full percentage point more expensive, adding hundreds of pounds to their mortgage bills.

Figures from Citizens Advice show a 35 per cent rise in mortgage queries in January and February compared with 12 months ago. There was also a 13 per cent rise in calls about difficulties in paying water bills and 11 per cent more people struggling with fuel bills.

Nearly a third of the 5.7 million new problems dealt with by Citizens Advice staff in 2006-7 concerned debt.

The borrowers with the most debt were in London and the South-East with Richmond-upon-Thames topping the table followed by Putney, Kingston-upon-Thames and Windsor.

Teresa Perchand, Citizens Advice director of policy, said: "Our bureaux are reporting very sharp increase in the number of mortgage arrears problems. The combination of big increases in household bills, especially fuel, and rising housing costs is addling additional pressurewhen people are already stretched to the limit."