July 31 (Bloomberg) -- Ben Craster says he'll be drinking less beer this summer, and Christine Baines is cutting back on clothes and cosmetics. They're among the millions of Britons preparing for a mortgage crunch.

Craster, a London designer, and Baines, a company director from Knutsford, England, will have to arrange new home loans as fixed-rate discounts expire on mortgages they took out two years ago. The Bank of England has raised borrowing costs five times during the past year, increasing the average monthly mortgage payment by about 100 pounds ($200), according to the Council of Mortgage Lenders.

About 2 million discounts will end during the next 18 months, the council said. The wave of refinancing threatens to slow consumer spending, which has boosted U.K. economic growth almost every quarter for the past decade, and may hurt stocks of retailers such as Tesco Plc and Marks & Spencer Group Plc.

``We have a fixed-rate squeeze coming,'' said Alan Clarke, an economist at BNP Paribas in London. ``Consumers are going to bear the brunt of a slowdown.''

Britons are more willing than any other nation in the Group of Seven to finance spending with debt, piling up a record 1.3 trillion pounds in borrowing.

To attract customers, U.K. mortgage lenders often offer a discount on interest rates for two to five years on 25-year loans. When the discount period ends, borrowers usually have the option to renegotiate or shop for a new mortgage.

Discounted Loans

The U.K. has the second-biggest proportion of home ownership in the G-7 behind Italy and 11.7 million mortgage borrowers. People who took out discounted fixed-rate home loans in 2005 account for about one sixth of the total, the mortgage council said.

Nigel Welch, 54, director of mortgage broker TS Mackenzie in London, said rates in 2005 were near record lows. About three-quarters of his 325 clients are getting loans with two-to three-year fixed-rate discounts again to protect against further increases.

The U.K. central bank raised its benchmark rate to a six- year high of 5.75 percent on July 5 to bring down inflation, which has held above the bank's 2 percent target for 14 months. While economists in a Bloomberg survey expect no change at this week's meeting, investors are betting on one more increase to 6 percent by the end of the year, based on interest-rate futures.

Borrowing Binge

Britain's borrowing binge has helped keep its economy growing for 60 consecutive quarters. The ratio of consumer debt to income in the U.K. is 1.62, the highest in the G-7, according to the National Institute for Economic and Social Research in London.

Surging house prices have buoyed consumer spending as home- owners borrow against the value of their properties. Central bank policy makers, led by Governor Mervyn King, said the economy may cool, ``possibly quite sharply,'' later this year, according to minutes of the July 4-5 rate meeting.

``I'm certainly not going to waltz into shops and buy new outfits or a pair of shoes,'' said Baines, 57, who has two fixed-rate mortgages expiring on holiday cottages.

In addition to the higher rate she expects on the new loans, Baines said she was ``shocked'' by the increase in arrangement fees banks are charging. She will pay 499 pounds for one of her loans, up from 325 pounds two years ago.

Higher Repayment

The fees are typically added to the loan, pushing the monthly repayments even higher. Joanne Raynor, a financial adviser at Solutions Ltd., a company that negotiates loans in Leeds, England, said the bulk of her 100 customers will pay an extra 250 pounds on average a month when they refinance.

``I have one particular client who is in dire straits,'' Raynor said. ``It's gone from not being able to go out to a wine bar as often as she would like to the point where she can't actually pay for her groceries.''

The number of Britons entering bankruptcy rose to a record in the first quarter. In 2006, the number of mortgage- repossession claims was the highest since 1992, just after the U.K.'s last recession.

Cheshunt, England-based Tesco, the U.K.'s biggest retailer, said in June that 2007 will be a ``tougher year'' partly because of the mortgage crunch. Stuart Rose, chief executive officer of London-based clothing retailer Marks & Spencer, said on July 10 that sales will be ``very challenging.''

Extend Declines

Graham Secker, a strategist at Morgan Stanley in London, predicted retailing stocks will extend declines in the second half. So far this year, the FTSE All-Share Retailers Index has fallen 11 percent versus a decline of 0.3 percent for the All- Share Index.

``We don't think investors should own anything that has a big consumer angle,'' said Secker. ``It will be at least a year until we see a light at the end of the tunnel.''

Designer Craster, 33, said a new mortgage ``is going to cost me an extra 200 to 300 pounds a month, easily.'' After considering the impact on his beer budget, he said he may take more drastic action.

``I may think about selling,'' he said after cycling to visit a client to save a one-pound bus fare. ``It's getting too expensive to live in London.''

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.netSarah Jones in London at sjones35@bloomberg.net

Last Updated: July 30, 2007 19:02 EDT