As the credit crisis worsens economists are warning that mortgage rates may hit seven per cent this year.

It could be the highest in a decade if it happens and would affect everyone from those trying to get on the mortgage ladder, those hoping to move home to even the estimated 1.4 million people whose mortgages will be due for re-financing this year.

Economists warned further that the Bank of England would likely increase its rates this year, which will come as a shocker to homeowners after they were told a few months ago that the rates would drop.

The sharp spike in the rates on the swap market – the money market where banks and building societies go to raise funds for customers’ mortgages - is largely to blame for the possible rise.

Rates on the swap market are usually affected by City fears that inflation is running at such a high level that the Bank of England will be forced to increase its base rate.

The surge this month saw swap rates rising from 5.80 per cent 10 days ago to 6.3 per cent. And experts predict that mortgage rates could rise to seven per cent.

“If the recent rise in swap rates is sustained, two-year fixed mortgage rates could approach 7 per cent in the next few months. With demand in the market already so weak, that would represent another huge blow to the housing market outlook,” said Ed Stansfield, a property economist at Capital Economics, a forecasting house.

He suggested further that the whole scenario points to the possibility of a long period of economic weakness.

Director at mortgage broker Savills Private Finance, Melanie Bien warned that with the rate increases already introduced by Abbey and Woolwich, other lenders may follow suit and make mortgages a lot more expensive for those remortgaging or buying a new home.