Borrowers have been warned that mortgage rates will continue to rise in the coming months, further damaging the fragile housing market.

Soaring inflation has stoked fears that the Bank of England will raise interest rates over the coming months.This has led to a steep rise in two-year swap rates, the interbank rates that dictate the price of fixed-rate mortgages. Swap rates have jumped from 5.8 per cent to 6.29 per cent over the past two weeks.

Lenders have followed suit. Woolwich, the mortgage lending arm of Barclays, has lifted the rate on one of its two-year fixes by almost a third of a percentage point to 6.69 per cent. Bradford & Bingley, meanwhile, has increased its deals by up to 0.55 percentage points. The best two-year fix from RBS or NatWest rose by four tenths of a point to 6.39 per cent.

Melanie Bien, of Savills Private Finance, the mortgage broker, says: “Borrowers should act quickly to take advantage of current deals because the evidence suggests that rates will keep rising. Some lenders have already repriced loans and others are likely to follow.”

And with the danger of an increasing number of homeowners falling into negative equity, lenders are also getting tough with borrowers who do not have substantial equity in an existing property or a sizeable deposit.

Only new homebuyers with at least a 40 per cent deposit can expect to get the best deals from Halifax, the UK's largest lender, after it revised its rates yesterday. With the average house price in England and Wales at £218,875, Halifax borrowers require £87,550 in equity, or as a deposit, to obtain a rate of less than 6 per cent.

Abbey announced that it would not allow new borrowers applying for a 95 per cent loan to add the application fee to the cost of a mortgage. Instead, they will have to pay the £2,499 charge upfront.

Louise Cuming, head of mortgages at Moneysupermarket.com, the comparison website, says: “Abbey is clearly nervous about allowing borrowers to exceed the 95 per cent limit in the current climate. I fear that this will be a growing trend, leaving applicants not only needing a 5 per cent deposit, but also significant savings to cover fees, stamp duty and solicitors' costs.”

Meanwhile, new data from the financial website MoneyExpert.com shows that the average application fee has soared from £517.19 in September 2006 to £860.25. There are 323 deals with a fee of more than £750, compared with 22 in September 2006. The highest fee is £3,999 on a Halifax three-year fix.

Richard Farr, of the Association of Mortgage Intermediaries, says that reports of soaring fees should not deter borrowers, although they must do their homework. “A mortgage deal with a high fee can still represent the best deal because of a lower rate or longer term,” he says. “Borrowers need to calculate carefully.”

Soaring mortgage costs are not the only worry. Falling house prices have left more than 30,300 homeowners in negative equity, says the Council of Mortgage Lenders. Morgan Stanley, the investment bank, believes that a further two million households are at risk of owing more than the value of their property if house prices fall 20 per cent by 2010.

Case Study: New deal in the nick of time

Barry Anderson and Claire Lewis began organising their new mortgage two months ago because they were advised that rates were likely to soar. Despite their forward planning, the couple, of Surbiton, southwest London, will still pay an extra £250 a month when they remortgage.

Their new deal is a lifetime tracker with Lloyds TSB Scotland, fixed at 0.31 percentage points above the Bank of England base rate. Their previous deal was 0.38 points below the base rate.

Mr Anderson, a solicitor, says that they considered two and three-year fixes but decided that the rates were not attractive enough. He adds: “We could see that mortgage rates were climbing and we were told by our broker to get in early and pick up a decent deal before the market worsened.”