More than four million households have resorted to personal loans or credit cards to cover mortgage or rent payments in the past year.

The financial comparison site Moneysupermarket.com said that many more homeowners could be sucked into a spiral of servicing long-term debt with expensive short-term borrowing when about £30 billion of mortgage deals come to an end this month.

It pointed out that homeowners who take a personal loan to repay a mortgage, but lie about the reason, risk being charged with fraud.

Tim Moss, head of loans at Moneysupermarket.com, said that the findings of a survey by the site were shocking. “Having a roof over your head has to be your top priority but funding that with a loan you might default on or a credit card that will eventually charge you interest of over 15 per cent isn't the solution.”

Oil is the key to world recovery

The shock of $140 oil has created inflationary and deflationary pressures that threaten world economy and policy tools

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BACKGROUND

• Oil is the key to world recovery

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James Gordon, retail director at Ernst & Young (E&Y), the accountants, said family finances were under enormous strain as the rising cost of living squeezes their budgets to breaking point. “The consumer economy is undoubtedly on a knife-edge,” he said.

This week the Bank of England revealed that credit card borrowing staged its sharpest rise in May for almost two and a half years. A survey by E&Y found that households were 15per cent worse off than they were five years ago.

Homeowners are spending 78 per cent more on mortgage repayments, paying an average of £735 a month. Energy bills have jumped 100 per cent, petrol is up 29 per cent and council tax 25 per cent.

The squeeze on households was underlined by the Bank of England's latest report on credit conditions. It showed that home loan payment defaults were rising faster than banks and building societies had expected.

More evidence also emerged that the credit crunch is continuing to hit the real economy with an influential survey showing that the dominant services sector shrank last month at its fastest pace in seven years.

Overall services activity tumbled during June at a rate not seen since the aftermath of the September 11, 2001, attacks on the US, according to the latest CIPS purchasing managers' survey of the sector.

The news followed the CIPS manufacturing and construction surveys this week, which showed those sectors contracting. It was the first time that all three industries have shrunk simultaneously in any month since November 2001.

The Chancellor insisted yesterday that the economy would not slip into a recession, despite mounting evidence that the outlook is worsening. Alistair Darling said: “The UK economy is fundamentally far, far better than it ever was in the past.

“We're going through a very difficult time at the moment, along with every other country in the world. I believe that our economy will continue to grow ... although the rate of growth will be slower.”