(For more future updates, kindly subscribe to this blog's feeds via RSS reader or via e-mail.)

Some of Britain’s poorest homeowners could see their mortgage costs rise by as much as 60% over the coming months as the “credit crunch” feeds through to consumers, a report claims.

The credit ratings agency Standard & Poor’s yesterday warned UK mortgage holders who are soon to come off fixed-rate mortgages to expect a “payment shock” - particularly if they have a poor credit history and fall into the so-called sub-prime group. “Borrowers who took out two-year fixed-rate mortgages from late 2005 are facing one of the largest payment shocks witnessed since the 1990s, even if they are able to refinance,” it said.

The problems are expected to hit sub-prime borrowers hardest because the mortgage companies that provide those loans have always been much more reliant on the money markets. As they are forced to pay more, their borrower may find that loans offered two years ago are no longer available or are prohibitively expensive. Those with perfect credit histories will be less affected but may still see rates rise if the market turmoil persists.

The Council of Mortgage Lenders (CML) has calculated that about 2m fixed-rate mortgages - about 17% of the total British market - will be ending before the end of 2008. Anyone seeking to renew their borrowings will have to do so at “significantly higher” rates, the report warned.

Homeowners were already feeling the heat before the credit crunch that brought the near collapse of Northern Rock. The Bank of England has increased rates five times since August last year.

The report suggests that if the credit crunch continues, sub-prime borrowers could easily see their mortgage costs rise by 26%, which would add an average of £167 to month payments on a £85,000 loan. If the market worsens even further, the report concluded that borrowers with the worst credit histories, who took out cheaper, interest-only mortgages, could see their mortgage payments rise by as much as 60%, a rate that would force many into substantial arrears.

A CML spokeswoman said the payment rises would be “manageable” for most borrowers, although she conceded that the effects could be considerable for the 5% of mortgage applicants who are considered sub-prime. “Some lenders are putting in place arrangements to ensure that borrowers are alerted early,” she said.

(For more future updates, kindly subscribe to this blog's feeds via RSS reader or via e-mail.)

Britain’s property market cooled further in August and households have already begun to extract less cash from their homes, data showed on Monday, suggesting the consumer sector could be in for a bumpy ride.

The number of mortgages approved for house purchase — a leading indicator of the housing market — fell to a four-month low in August, according to Bank of England figures. Mortgage lending grew by its weakest amount in more than a year.

Separate data showed housing equity withdrawal, a driver of consumer spending over the past two years, fell to 10 billion pounds in the second quarter, the weakest reading in almost two years.

As a percentage of income, housing equity withdrawal amounted to 4.5 percent of post-tax income, its lowest level since early 2005.

“Reduced housing equity withdrawal is likely to add to the increasing pressure on consumer spending already coming from higher interest rates, modest real disposable income growth and increased debt levels,” said Howard Archer, chief UK economist at Global Insight.

Rising house prices in recent years have encouraged Britons to refinance home loans to free up cash for other spending.

This source of funding now looks at risk as tighter credit conditions and the near-collapse of Northern Rock bank (NRK.L: Quote, Profile , Research) in September are likely to exacerbate the housing slowdown in the next few months.

POINTING DOWNWARDS

The Bank of England said mortgage approvals fell to 109,000 in August from 115,000 in July. This was the lowest reading since April.

“We think there will be a further decline in September as a freeze on subprime lending feeds into these figures,” said Peter Newland, economist at Lehman Brothers.

Other areas of the economy are also suffering. A survey on Monday showed that growth in Britain’s manufacturing sector slowed more sharply than expected last month, while another showed financial services firms have become more gloomy about future profit growth than at any time in the past 17 years.

British interest rates have risen five times since August 2006 but most economists believe they may soon be cut to shore up growth.

Consumer confidence fell to its lowest in almost two years following the Northern Rock crisis, a survey showed last week, while the Britannia Building Society said home repossessions were already ticking up.

“Although official retail sales figures have so far held up well, we are likely to see a softer period of household consumption in the coming months,” said Philip Shaw, chief economist at Investec.