Fears that the credit squeeze will hit the housing market were re-ignited yesterday after a warning that rising borrowing costs are leaving banks struggling to find the money to fund new mortgages. Financial Times

Three-month inter-bank interest rate hit 6.59% yesterday,not seen since the week the Treasury stepped in to save Northern Rock depositors.

Raised borrowing costs are dealing a severe blow to smaller lenders, who have few alternative financing options, the Council of Mortgage Lenders said. Figures from the Land Registry showed the first tentative signs of house prices falling in London – 0.6% down in October on the previous month.

Jackie Bennet, head of policy at the CML, told a City audience it was an illusion to think banks’ retail deposits could cover any shortfall in wholesale funding for mortgage lending.

Net mortgage lending in the UK has averaged about £9.5bn a month over the past year, while Bank of England figures show retail deposits have grown by an average of £6bn a month over the same period.

With short-term wholesale lending markets seized up and other funding strategies, such as covered bonds, facing difficulties, the shortfall in bank financing is likely to drive up mortgage costs, making loans harder to obtain.