BRITAIN’s banks are expected to report a sharp rise in people struggling with their mortgages in the next two weeks, as the impact of five interest-rate hikes in less than a year starts to bite.

Analysts forecast that leading banks will announce a surge in mortgage arrears as well as bad-debt charges linked to mortgages. According to one, UK banks wrote off just £56m in the first quarter of this year. But this is thought to have more than doubled to £140m between April and June. Some analysts now predict that the losses could reach £500m for 2007 and jump to £650m in 2008.

The mortgage bad-debt charges are dwarfed by the £842m losses on personal loans and £897m on credit cards that Britain’s listed banks suffered in the first quarter of 2007. However, the sharp rise in so-called mortgage impairments will be seen as the strongest evidence yet that the benign market of the past few years is coming to an end.

“Bad debts for mortgages have been at an unsustainable low for too long. The market is now getting a lot more realistic. It’s a ticking timebomb,” said one banker.

Northern Rock, the mortgage and savings bank that kicks off the banking reporting season on Wednesday, has already indicated a slight increase in mortgage arrears of more than three months in the first quarter.

Bradford & Bingley, a big player in the sub-prime and buy-to-let markets, is also expected to announce rising arrears.

However, bankers believe the impact of rising interest rates will be most severe in the second half of 2007 and the first half of next year. More than 2m homeown-ers will be forced to take out new mortgages at higher rates when their two-year fixed-rate deals mature in the next 18 months. Many could see their costs soar by 80% if they are forced to move to a standard variable rate.

Spiralling house prices have forced some borrowers to overstretch themselves to get on the property ladder while the record £1,000 billion of consumer debt has added to fears that hundreds of thousands of people will face financial difficulties.

According to investment bank Sanford Bernstein, mortgage payments have increased from 15% of the average household’s income in 2002 to 22% today.

Repossessions rose by a dramatic 66% last year to 17,000, according to the Council of Mortgage Lenders, as one in every 690 mortgage holders was unable to keep up payments.

The CML expects repossessions to rise to 19,000 this year and 20,000 in 2008. However, the figures are way below the 75,000 repossessions at the peak of the housing crash in 1991.

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