Annual lending in sub-prime mortgages could be as much as £30 billion, representing 8 per cent of the UK’s total mortgage market.

Figures from HBOS suggest the market will hit £29 billion in 2008, from £10 billion in 2004.

Estimates from the Council of Mortgage lenders, however, put the amount as low as 6 per cent of total mortgage loans, or £15 million in lending. The discrepancy appears to lie in the definition of “sub-prime” as opposed to the lower-risk customer, known as “near prime”.

Regardless of precise definitions, there is overall consensus that figures are predicted to rise.

Higher interest rates, feeding the rising tide of personal insolvencies, have boosted demand for sub-prime mortgages.

No longer the last refuge of the damned, sub-prime mortgages, traditionally offered by high-fee charging specialists, are now offered by mainstream lenders such as Northern Rock and Abbey.

However, higher interest rates also cause mortgage arrears to increase, threatening the stability of the sub-prime market.

Lenders are watching the rise in bankruptcies and insolvency agreements with caution, believing that the UK has not yet reached the top of the credit cycle.

It is thought that the consequences of the rise in unsecured credit, already being keenly felt by the banks, has not yet impacted fully on mortgage lenders.

Another rate rise from the Bank of England is widely expected in August, which could tip struggling homeowners into arrears.

Clive Briault, the managing director of retail markets at the Financial Services Authority, recently warned that sub-prime mortgage lenders in the UK could follow their troubled US counterparts unless they change lending practices.

However, UK lenders argue that the market is somewhat protected from the harm. The basis for this argument is that the UK does not allow the heavily discounted products that contributed to the problems in the US.

In an attempt to mitigate their risk further, some lenders, such as BM Solutions, have confined themselves to the “light adverse” or “near prime” market, dominated by higher-earning customers with minor credit problems. These less risky borrowers tend to have a salary above the minimum wage, yet have acquired an adverse credit rating usually through a singular bad debt.

High Street lenders, such as Abbey, Alliance & Leicester and Northern Rock, are also selling their high-risk customers to specialist third party lenders in an effort to share the risk.

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