HUNDREDS of thousands of borrowers coming to the end of cheap two-year mortgages are being warned they could be frozen out of top new deals as the credit crisis worsens.

Brokers have warned that lenders are asking for bigger deposits for the best loans and subjecting customers to more stringent income checks as they become increasingly cautious about whom they give money to.

Banks and building societies also raised tracker rates for new borrowers last week and economists warned the deals are unlikely to get cheaper even if the Bank of England chops interest rates as expected – so people coming to the end of a deal should act fast to secure another top rate.

Nationwide, Britain’s biggest building society, will put up its headline two-year tracker from 5.68% to 5.83% on Tuesday, while the equivalent rate for remortgages will rise from 5.83% to 5.98%.

The mortgage freeze came as it reported that prices dropped 0.8% in November, the largest monthly fall for 12 years. Annual growth fell from 9.7% to 6.9%.

Most analysts now agree the slowdown has started, with the only question being the extent of it. Nationwide and Halifax think prices will be flat next year, with falls possible in some areas. But some economists predict dips of about 10% (see table, right).

David Miles at Morgan Stanley, who investigated the mortgage market for Gordon Brown, said: “A year ago our best guess was that we would have another 12 months of rises before the market turned and prices started to fall, which is what seems to be happening. A significant fall in house prices is now likely; the question is how big it will be.

“House prices fell 25% in real terms in the 1970s. That is not what I’m predicting, but it gives you an idea of what has happened in the past.”

Until now it had been assumed that a mortgage freeze would only be a problem for borrowers with bad credit records – called sub-prime. However, brokers say standard borrowers are also struggling – especially people with larger loans.

This is bad news for more than 300,000 people who took out rock-bottom fixed rates in the winter 2005 and are now coming to the end of their deals.

They were already facing a payment shock because rates are much higher than two years ago, but the credit crunch means that they could now be turned down from the cheapest remortgage deals.

Katie Tucker at broker John Charcol said: “Anyone with a deposit of 20% or less or borrowing five times income or more will find it more of a struggle. For some it might mean they have to jump through more hoops to secure a loan; others will find they have to stump up a bigger deposit or cut the amount they borrow to secure the best deal.”

Bank of England governor Mervyn King said last week the months ahead would be “uncomfortable” as tighter lending conditions in the wholesale markets, where banks and building societies borrow the money to lend to us, hit the housing market. The Council of Mortgage Lenders also warned some lenders could run out of money in the new year, if conditions did not improve.

The three-month Libor rate, the main rate at which UK banks lend to each other, jumped to 6.59% last week, its highest level since the Northern Rock crisis in September.

Scarborough building society, which has topped the best-buy tables in recent years, has raised the deposit required on some of its standard loans from 15% to 20%. And HSBC has raised the deposit required on mortgages of £250,000 or more from 10% to 20%. On smaller deals it requires a 10% deposit, up from 5% earlier this year.

Melanie Bien at Savills Private Finance said: “It has become a struggle for some borrowers to get a loan with less than a 20% deposit especially in the £1m-plus market.”

Borrowers are also being warned to allow extra time to apply for a new deal as lenders become more stringent. Brokers say that applications that would normally be completed in four weeks are taking double that.

Borrowers are being urged not to be deterred from searching out a new deal, though. Interest rates are expected to be cut by a quarter point to 5.5%, possibly as early as this week, although February is thought most likely. However, many analysts believe discount and tracker loans could get more expensive for new customers.

Ross Walker at RBS Financial Markets said: “With money market rates on the rise I’d expect mortgages to get more expensive.”

This time in 2005, you could have fixed for two years at 4.29%. Now the cheapest remortgage deal is a five-year fix from Britannia at 5.39%, according to L&C Mortgages.

Emily Ward, 30, from Bath, will see her monthly payments leap by £100 from this month after switching from a two-year fix paying 4.29% to a tracker with Saffron Wal-den at a rate of 5.48%.

She said: “The hike is affordable but it is still going to be a shock.”

Where to find the best deals

THE turmoil in the financial markets means it is getting harder to get a good mortgage deal, but it’s not impossible.

Here we explain how.

Tracker or fixed rate? The best five-year fixes look cheapest: Britannia has a deal fixed at 5.39% for five years. The best two-year fix from Cheshire charges 5.49%.

However, brokers believe you could be better off snapping up a good tracker or discount. While rates are going up for new borrowers, once you have locked in your loan it should be linked to Bank rate. The Bank of England said last week that two, or three, quarter point cuts in Bank rate could be needed next year to shore up a slowing economy.

Principality has a two-year discount at 5.69%, while C&G has the cheapest tracker at 5.98%, though it insists on a 40% deposit. Hinckley & Rugby is next best at 5.99% with a minimum 20% deposit.

Bank rate would need to come down twice for the Principality deal to work out cheaper than the Britannia fix.

If you would prefer a fix, and can wait, brokers believe cheaper deals may begin to appear early next year.

Fixes are priced according to swap rates, not Libor like variable deals, which reflect the City’s view of interest-rate rises. The cost of two-year money has fallen significantly since the summer as the chances of an interest-rate cut have grown, but could drop further.

Last week swap rates were at 5.52% – suggesting a quarter point fall in Bank rate rather than the two to three cuts expected by some in the City.

How do I improve my attractiveness to lenders? You should order a copy of your credit record to check all the information about you is correct. You can apply direct to any of the credit-reference agencies – Experian, Equifax and Callcredit – for your credit file.

You also improve your chances of having access to the best deals if you have a deposit of 20% or more and don’t need to borrow a high income multiple.

If you have a spotless credit record and tick these boxes, now could be a particularly good time to remortgage: brokers say some lenders will waive your application through as they struggle to deal with higher risk cases.

Anything nonstandard could make it more difficult to get the best deals, including being self-employed or recently divorced.

Lenders are also imposing tighter conditions on buyers of new-build properties. Many have increased the maximum deposit required to 25% compared with 15% earlier this year.

Are any of my other bills going to rise? Some lenders have been increasing credit-card rates for existing customers. About half of all credit-card applications are now turned down, up from a third last year.

Average rates on personal loans of £5,000 have also soared to 9.5% compared with less than 7% before the crisis.

Is the value of my home going to fall? Most analysts agree that house price falls, at least in some areas, are now likely. Where they disagree is on how much average prices will drop over the year.

Karen Ward of HSBC’s investment bank thinks house prices are overvalued by 30% and reckons they must fall to correct this. “I don’t think prices will stay flat while earnings catch up; markets just aren’t like that. I think expectations for falls of 5% to 10% look sensible,” she said.