First Direct has closed its doors to new mortgage customers after receiving five times the usual volume of applications in recent weeks.

The internet and telephone bank, owned by HSBC, said that it was receiving an unprecedented level of business after recent moves by rival banks to pull similar mortgage deals because of the high costs of funding as a result of the credit crunch.

First Direct said it was taking longer to process applications than it would like, but added that it was a temporary measure until the backlog is cleared.

Chris Pilling, First Direct’s chief executive, said: “Rather than increase interest rates dramatically to discourage new applications, we’ve decided to withdraw temporarily from offering mortgages to noncustomers until we’ve cleared the backlog.”

Some lenders such as the Nation-wide Building Society and Chelten-ham & Gloucester, have raised their mortgage rates for new borrowers.

First Direct’s move also comes as NatWest and Royal Bank of Scotland and Kent Reliance Building Society prepare to raise their variable mortgage rates for existing customers this year.

NatWest and Royal Bank of Scotland announced they were increasing the interest on their variable-rate offset mortgage from 6.2 per cent to 6.45 per cent from today. Kent Reliance raised its standard variable rate for both new and existing customers by a quarter-point to 7.59 per cent.

First Direct’s two-year fixed-rate mortgage deals of 4.95 per cent are seen as one of the most competitive.

The squeeze on credit by mortgage suppliers is already hitting the housing market. House prices in London and the South East are on the slide, two new surveys have revealed. London house prices fell 0.4 per cent in February, compared with January, with the average house price dropping to £353,760, according to Land Registry data. The fall was the biggest monthly decline in two years, fuelling fears that further sharp falls may be around the corner. In the South East, prices fell 0.7 per cent in February to £230,717.

Worries over City jobs and bonuses have affected prices of multimillion-pound homes in the capital, where price inflation last year was rampant. The number of London properties changing hands worth £1 million or more fell by 32 per cent in February, from 317 to 215, according to the Land Registry. Across England and Wales, sales in this bracket fell from 542 to 381.

Land Registry figures revealed that prices across London fell most sharply in the west and southwest boroughs. Many bankers begin with a flat in Ken-sington and Chelsea, before moving to larger family homes in the Barnes-to-Richmond corridor.

Knight Frank, the property agency, reported that prices of homes worth £1 million to £5 million were static, with a 0.1 per cent rise in March over February. The number of prime Central London homes sold in this bracket in the first quarter fell by 20 per cent.

Worst affected were homes worth £3 million to £5 million, the bracket favoured by City bankers from Notting Hill to Knightsbridge. Prices were unaltered in March, taking the three-month rise to only 1.5 per cent.

Liam Bailey, of Knight Frank, blamed “growing fears for job security in the City”.

This week Capital Economics, the forecasters, said that it was “entirely plausible” that London house prices could fall 25 per cent over two years.

Experts' views

— Martin Ellis, Halifax's chief economist, predicts flat prices this year.

— Fionnuala Earley, chief economist at Nationwide, expects “modest falls” in 2008.

— Mervyn King, Governor of the Bank of England, forecasts prices could remain “broadly flat” over the next four years, but price falls are “conceivable”.

— Capital Economics sees a 5 per cent fall this year, 8 per cent in 2009 but a “plausible” 25 per cent fall by mid 2010.

— David Miles, Morgan Stanley's chief economist, says that house prices could fall by 20 per cent over two years.

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