Homeowners have been warned that the mortgage freeze could last for another two years, as Halifax, Britain’s biggest mortgage lender, halved its mortgage range yesterday.

The bank cut the amount it would lend on two-year deals, the most popular type of loan, from 90% of the property value to only 75%. Rates were also raised by up to 0.3 percentage points, adding £600 to the cost of a £200,000 loan.

The move came as another of Britain’s biggest banks warned the pain could last well into 2010, even if the American government’s $700 billion bailout — designed to kickstart lending — succeeds in calming markets.

Andy Mielczarek, head of lending at HSBC, which has doubled its share of new mortgages to 6% in the credit crisis, told The Sunday Times: “While Bank rate and Libor [the average rate at which banks lend to each other] may well fall over the next six to nine months, the cost of capital for many banks may not reduce for up to two years, meaning their appetite for lending may well not increase as a result.”

Mortgage costs have soared over the past two weeks as the collapse of Lehman Brothers in the US and the rescue of Halifax Bank of Scotland in the UK have made banks reluctant to lend to each other. The turmoil has added £1,100 to the cost of a new £200,000 mortgage in just a fortnight.

Woolwich, owned by Barclays, took the unprecedented step of pulling all its two-year fixed-rate mortgages last week. Meanwhile, Abbey cut its maximum loan to 75% of the property purchase price just two weeks after it raised it to 85%.

HSBC, Yorkshire building society and Royal Bank of Scotland also raised rates or withdrew mortgages. Nationwide said its rates were “under review”.

Here we make sense of the turmoil.

I THOUGHT BANK RATE WAS COMING DOWN, SO WHY ARE LENDERS RAISING RATES FOR NEW BORROWERS?

You’re right. Most experts predict that the Bank of England will cut rates from the current 5% to prevent the British economy falling into a recession. They think Bank rate could be down by a full percentage point to 4% before the end of the year.

This is good news for borrowers who already have a base-rate tracker, as their repayments will fall in line with Bank rate. However, for anyone remortgaging on to a new rate in the coming months, the picture is more complicated.

Normally, wholesale markets reflect expectations of where Bank rate will be in the future. However, over the past fortnight the money markets have become divorced from official rates as banks have become reluctant to lend to each other for longer than a week.

WILL THE BAILOUT HELP?

It should do, eventually. The fund proposed by the US Treasury will buy toxic mortgage-backed securities from banks. With the assets gone, banks should begin to trust each other again.

SO WHY COULD THE MORTGAGE FREEZE LAST FOR ANOTHER TWO YEARS?

Lenders are unlikely to rediscover their appetite for lending for as long as two years, some experts predict.

They are going to be under pressure from shareholders to rebuild their margins — in other words, they will charge significantly more than it costs to lend to boost profits.

ARE FIXES OR TRACKERS GOING UP?

Both, unfortunately. The spike in wholesale rates has affected all mortgages so expect them to become more expensive for new borrowers in the coming months.

I AM COMING UP TO REMORTGAGE. WHAT SHOULD I DO — FIX OR TRACK?

With Bank rate set to fall, a tracker is a good idea, but prepare for any reduction to be delayed until next year. There is a slight chance of this because of high inflation.

Fixed rates are also cheaper — Bank rate would have to fall at least twice for trackers to become more expensive. The best fixed-rate deal for borrowers is at 5.19% from First Direct with a fee of £1,999 for borrowers with a 20% deposit. The best tracker is 5.54% from Abbey with a fee of £1,999 for those with a 40% deposit.

DO I NEED TO ACT FAST?

Yes, these rates are unlikely to last. You can book some rates, including Halifax’s, up to six months ahead of your remortgage date.

CAN I HEDGE MY BETS?

Yes. If you take out a lifetime tracker with no early redemption penalty you can move into a fix if you decide to at a later date. HSBC-owned First Direct has a penalty-free tracker at 5.49% with a fee of £999 for borrowers with a 20% deposit. Monthly repayments work out at £920, or £12,041 over a year. For borrowers with a 10% deposit, HSBC also has a 5.94% tracker with no penalty with a £499 fee.

Brokers are also recommending deals known as a drop locks. They allow you to take out a tracker, but you can switch to a fix from the same company at any stage without penalty. However, these are considerably more expensive than the lifetime tracker option.

Nationwide has a drop lock at 5.43% with a fee of £1,999 for those with a 40% deposit. At £1,231 a month, the repayments are £311 a month more than the First Direct deal.