NATIONWIDE, Britain’s biggest building society, has warned that house prices could drop 5% this year because of the credit crunch.

It is the first of the big lenders to publicly say values could fall. Its official forecast, and that of rival Halifax, is that prices will be flat this year.

Fionnuala Earley, chief economist at Nationwide, said: “We have always thought there was a risk of falls of up to 5% if the financial unrest carried on for longer than anticipated.”

The prediction comes amid widespread fears of a mortgage “famine” as lenders rein in their lending.

Michael Coogan, of the Council of Mortgage Lenders, said: “We have entered a substantially slower phase in the housing market and there will be problems in the mortgage funding markets unless the Bank of England makes new, broader-based attempts to improve levels of liquidity.”

The CML is still sticking with its official forecast of 1% house-price growth this year, but it admits privately that it may need to look at the prediction again later in the spring.

Mortgage rationing has so far affected only borrowers with smaller deposits or black marks on their credit files, but brokers said there are signs it is spreading.

In the past fortnight, Mortgage Express, part of Bradford & Bingley, suspended all lending through brokers for one week, while Scottish Widows closed its phone lines to brokers. Halifax, Abbey and Lloyds TSB have also restricted deals available via brokers.

Small building societies have been hardest hit. Bath pulled all its deals last week except those at its standard variable rate, saying the mortgage market had come to a “standstill”. Cheltenham & Gloucester, meanwhile, has said that borrowers relying on bonuses of more than £100,000 must now be referred to underwriters.

Jane McLelland, 31, of Tunbridge Wells, Kent, was forced to borrow £18,000 from her parents or face punitive rates when she came to remortgage after lenders valued her home at less than she had been expecting. With a mortgage of £198,000, she believed the property to be worth £220,000 and therefore needed to borrow 90% of the value of the property.

However, Abbey said the 2-bedroom flat was worth just £200,000, taking her mortgage to 99% of the property value – but it does not offer loans on such high values.

McLelland said: “I bought my home two years ago for £200,000 and it was valued in October at £215,000. I was really disappointed that they downvalued it. Luckily, I had the option of finding more money so that I could reduce my loan to £180,000, or 90% with Abbey.”

Richard Morea of brokers L&C, said: “Surveyors are coming under increasing pressure to tighten their valuations as the property market starts to cool.”

Ray Boulger, of John Charcol, a broker, said: “We had one client looking to remortgage with a £111,000 loan who was turned away because she couldn’t verify her address on the electoral roll despite other proof. Her property was worth £227,500 and we didn’t expect any problems, but her lender, Accord, didn’t agree.”

We offer advice for borrowers depending on your mortgage type.

REMORTGAGERS

Brokers advise most borrowers to start looking for a good deal now, even if you are not due to remortgage until the summer.

You can book a loan up to six months in advance. Booking fees, typically £100, are paid upfront and are usually unrefundable.

Tracker mortgages would normally be expected to fall with another interest-rate cut, but lenders have in fact been raising rates as they grapple with the credit crunch, so it is unlikely you will lose out much by booking now.

The cheapest tracker is the Coop’s at 5.34%, compared with First Direct’s fix at 4.75%. The repayments on the fix would be £1,140 assuming a £200,000 loan, compared with £1,209 on the tracker – although the latter would fall to £1,179 with one more rate cut of 0.25 percentage points.

Bear in mind that First Direct is experiencing a two-week backlog for applications for new customers.

FIRST-TIME BUYERS

First-timers are being urged to save a deposit of at least 10% to get the best deals. A two-year fix for 90% of the purchase price from Derbyshire building society is at 4.99%, but you would have to pay 5.48% for a two-year fix from the same lender on a loan of 95% – a difference of £57.80 on a £150,000 loan.

SUPER-SIZE LOANS

While loans of up to 10 times income were available to borrowers a year ago, brokers warn you are unlikely to get even five times today, especially if you need to borrow more than £1m.

Abbey said last week it would now lend no more than 4.6 times salary at £60,000 – whereas a year ago such borrowers were guaranteed loans at five times income.

Melanie Bien of Savills Private Finance, a broker, said: “Lenders are concerned about applicants’ future earnings, particularly if they rely on bonuses so are more reluctant to lend.”

PUNISHED OVER MISSED CREDIT CARD PAYMENTS

KARL and Bethan Bruen, of Halstead, Essex, ( above) have been punished by their lender for missing two credit-card payments. They had their application for a £121,000 mortgage at 5.69% declined by Bristol & West.

Karl said: ‘We had no mortgage arrears or county court judgments but it seems those two missed payments almost cost us £151 a month extra in mortgage repayments.’

The couple were offered a sky-high 7.84% sub-prime deal with First National – which would have put their monthly repayments at £921, but turned to Chase de Vere Mortgages which found them a deal at 5.79% with Chelsea building society.

Simon Tyler of Chase de Vere said: ‘Many lenders who would have given this couple a mortgage are now out of reach.’

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