Credit crunch hits home for millions of Britons

By Steve Slater

LONDON (Reuters) - Millions of 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 the leading lenders, including HBOS HBOS.L, Nationwide and Lloyds TSB (LLOY.L), increased interest rates on their main products this week, 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 3 million homeowners will be coming off some sort of deal this year -- whether fixed rate or tracker.

PRUDENCE

The 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.

In the last month more than 2,000 residential and buy-to-let mortgage products have been withdrawn, with the number of products on offer dropping to 5,700 from 7,726, according to personal finance information provider Moneyfacts.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

Interbank borrowing costs for 3-month sterling rose for a 13th straight day on Friday to over 6 percent, their highest since late December, as banks have been reluctant to lend to each other and hoarded their cash.