Aug. 30 (Bloomberg) -- U.K. lenders responsible for 12 percent of the nation's mortgages are tightening standards for loans on house purchases, withdrawing offers and raising the cost for borrowers with less than perfect credit.

Merrill Lynch & Co.'s Mortgages Plc unit said yesterday that it raised its interest rates. Northern Rock Plc, the Newcastle upon Tyne building society that had 8.4 percent of the market last year, and Residential Capital Corp.'s GMAC-RFC unit, with a 3.5 percent share, said they stopped some offers and lifted costs for others. Deutsche Bank AG did the same, while two lenders backed by Investec Plc have stopped all subprime loans.

``There are some lenders who have pulled their current product range and not announced any new ones,'' said Ray Boulger, senior technical manager at Charcol Ltd., Britain's biggest online mortgage broker. ``Others have put up rates until they get little or no business.''

The changes add to evidence that homeowners are finding it more costly and difficult to borrow in Britain after a collapse in the U.S. mortgage market dried up credit around the world. That may hurt house prices, which tripled in the last decade to an average 198,915 pounds ($404,000) because banks were allowing homebuyers to take on loans of up to five times their income.

``The same person trying to get a mortgage will find the situation more difficult now than three months ago,'' said Fionnuala Earley, chief economist at Nationwide Building Society, the U.K.'s fifth-biggest home lender. ``Some lenders will reassess how much they want to lend. You're not going to stretch yourself for volume in a market you think is a little risky.''

Debt Burden

U.K. consumers shoulder a record 1.35 trillion pounds in debt, the highest per capita among the Group of Seven nations. Mortgage lending hit a record in July, rising 13 percent over the year even as the Bank of England raised its benchmark interest rate to the highest in six years.

Nationwide Building Society said today that house price inflation eased to 9.6 percent from a year ago in August from 9.9 percent in July. Lenders approved 115,000 loans for house purchase last month, the same as in June, the central bank said in London today.

In the U.K., so-called subprime lending to homebuyers with a shaky credit history accounts for about 6 percent of the market, half the level of the U.S., according to the London-based Council of Mortgage Lenders.

Quality of Lending

``Subprime lending has been of a higher quality in the U.K.,'' said Kelvin Davidson, a property economist at Capital Economics Ltd., a London-based consultant. ``But the problems don't really emerge until the market starts to turn down.''

The Financial Services Authority, Britain's securities regulator, last month said it had studied 485 subprime loans and found that more than half were awarded to customers who were not required to provide evidence of their income. And with almost half the loans, the brokers involved failed to adequately assess the ability of borrowers to pay.

John McFall, a member of Parliament for the ruling Labour Party, said he has been pressing Bank of England Governor Mervyn King to study the risk subprime borrowing has on the economy. On Aug. 8, King said ``I don't think there's much evidence of major damage to loan performance in other markets'' outside the U.S.

``We're walking blind,'' McFall said in an interview. ``I don't think there's any systemic risk, but there will be pain.''

Deutsche Bank's Link

DB Mortgages, a unit of Frankfurt-based Deutsche Bank, said on Aug. 22 that had it raised interest rates by around 1 percentage point. The firm also said it wouldn't be offering loans to first-time buyers.

``We're reacting to market conditions,'' Peter Beaumont, deputy chief executive of Mortgages Plc, said in an interview on Aug. 29. The company demanded bigger deposits from borrowers and raised its interest rates.

Infinity Mortgages, funded by Investec Plc, and Unity Homeloans, which Investec set up in 2006, said they would not take on new business. Unity blamed ``adverse movements in the capital markets'' in an Aug. 10 statement. Infinity cited the cost of borrowing and the difficulty of selling on debt securities.

``We're the victims of the global situation,'' said Simon Biddle, head of marketing for Infinity. ``The spreads that are emerging in securities are absolutely huge.''

Offers Withdrawn

Northern Rock said on Aug. 23 that it raised some rates and withdrew some of its subprime offers. Ron Stout, a spokesman for the company, said the changes weren't unusual.

Edinburgh-based HBOS Plc, the nation's biggest mortgage lender, hasn't changed its offers lately, said spokesman Mark Hemingway.

The lenders are concerned about increasing default rates in the U.K. A record 30,075 people in England and Wales declared themselves bankrupt in the first quarter, up 24 percent from a year ago, according to government figures.

So far, the lending squeeze hasn't slowed the broader market. In June, 102,000 loans were made for home purchase, the most since November, according to the CML. The lobby group doesn't identify how many were subprime loans.

Even so, higher costs to some borrowers will further inch up the cost of servicing a mortgage, which already is at its highest since 1992, according to Citigroup Inc.

``The longer the situation persists, the more likely it is that we do see the credit crunch feeding through to new borrowers,'' said George Buckley, chief U.K. economist at Deutsche Bank in London.

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net.

Last Updated: August 30, 2007 07:35 EDT