Britain’s biggest bank, HSBC, has become the first large institution to tighten its lending criteria amid fears that negative equity could return following four interest-rate rises since August.

The bank is worried that borrowers are not giving themselves a big enough cushion in case higher rates cause price falls. Homeowners are now being urged to “stress test” their loans to check they could cope with higher rates, and take action to reduce their debts if not.

The Bank of England last week raised interest rates to 5.5 per cent, their highest for six years. A borrower with a £150,000 interest-only loan has now seen his or her monthly repayments rise by £125 – or £1,500 a year – since August, when rates were at 4.5 per cent.

Many homeowners have so far been insulated from the pain because they took out fixed rates two or three years ago, but analysts said about 900,000 borrowers were set to come off these deals in the coming months and face a severe “payment shock”.

Background

• Will further interest rate cuts boost the housing market next year?

• A guide to the housing market forecasts

• The property market: a bleak future?

Background

• All set for slowdown

• Homes in N Ireland rise 54% to London levels

• House prices: top hotspots ... and the coolest

• What do Chelsea and Belfast have in common?

The London property market

Background

• Is the property boom finally over?

First-time buyers priced out

Houses will become completely unaffordable for first-time buyers unless many more are built, a national advisory unit says

• Reform of planning rules ‘vital’ to meet growth in demand

• How the mortgage market has changed

• The future of house prices: 10 times pay

Background

• Property prices grow at slowest rate in five months

• Buying a house 'will cost 10 times your income'

• How the mortgage market has changed

• First proof of decline in housing market

• Buy-to-let brigade could be the joker in pack

No one is suffering as much as first-time buyers

Lenders are getting more picky, yet property prices are refusing to fall far enough, fast enough

Background

• First proof of decline in housing market

• Fresh signs of cooling housing market

• House prices slow despite London surge

Background

• Mortgage slowdown triggers house price fears

• Buy-to-let tax shock

• Fall in mortgages raises fears of slowdown

• Signs emerge that UK housing is off the boil

• Interest rates put brake on house prices

End of house price boom is in sight

Societies saw an 8% drop in mortgage approvals last month compared with a year ago, the first such fall since 2005

Background

• Nationwide says slowdown may limit price rise

• House prices keep on rising

• Your guide to surviving the rate hike

• The return of negative equity?

Housing costs taking their toll

The question that always accompanies fresh data showing a fast-growing housing market is: are we headed for a crash?

Related Links

• Don’t take the hike

Most economists believe rates are at their peak, but a third of those polled last week by Reuters expected a further rise to 5.75 per cent by August. Some think rates at 6 per cent are a possibility, which would raise the spectre of widespread house-price falls and negative equity – where your mortgage is worth more than your home.

While most analysts think this is unlikely, HSBC is clearly worried. The bank has increased the deposit it requires by thousands of pounds to give itself a bigger buffer in case house prices drop.

Borrowers must now find a 10 per cent deposit, up from 5 per cent before. First-time buyers, who could previously borrow up to 100 per cent of the property’s value, must now put down 5 per cent. The changes mean borrowers wanting a £200,000 loan will have to save up an extra £10,000 before they can get a mortgage from HSBC.

Simon Tyler at Chase de Vere Mortgage Management, a broker, said: “This is a significant move. All we have seen recently is lenders relaxing their criteria, but HSBC is obviously worried that the recent interest-rate rises will have an impact on the housing market. It is trying to protect itself in case an increasing number of borrowers struggle to meet their mortgage payments and prices do fall in some areas.”

HSBC is not the only worried lender. GMAC RFC, part-owned by General Motors and Britain’s 10th-biggest lender, announced on Friday it would no longer lend on properties in Thamesmead, southeast London. The area is dominated by new-build properties, particularly flats, and the lender fears oversupply could cause price falls.

Jon Maguire at Cru Investment Management said: “Interest rates could go up to 6 per cent by the end of the year. It wouldn’t surprise me if the housing market crashed. The situation is very similar to 1989 and terms such as negative equity may well revisit the UK with a vengeance.”

House prices have proved resilient in the face of rate rises – so far. Figures from Halifax show they rose by a healthy 1.1 per cent in April, and are up 10.9 per cent over 12 months. But this was the smallest monthly increase this year.

Analysts said one of the main drivers of the continued strength in the housing market has been the boom in London and the southeast. In areas such as the north and Midlands things are much more sluggish as rising interest rates take their toll.

James Falla at Thomas Charles, a debt consultancy, said: “Mortgage payments are up 20 per cent in under a year, while incomes have not risen by nearly as much. This is a significant increase in the cost of living for people with variable-rate mortgages and can only be bad news for those on the edge of a debt crisis. ”

One in seven borrowers is now struggling to meet repayments, according to research from Mform, an online mort-gage-comparison service. However, most housing analysts expect the market to cool, rather than collapse.

The worst that the majority of analysts will predict is several years of stagnation, where prices rise only in line with earnings at about 4 per cent. Fionnuala Earley at Nationwide building society expects the rate of growth to drop to between 5 per cent and 8 per cent by the end of the year.

She said: “We are not heading for crash territory. We may see falls in some areas or some monthly national drops, but I don’t expect a sharp deterioration in property values. For that, we would need high unemployment as well as high interest rates.” Sam and Claire Laite, pictured with their six-month-old daughter Emily, remortgaged on to a two-year fix with Abbey to protect themselves from further rate rises