BRITAIN’s banks are slashing the amount they will lend to borrowers to take account of rising food and fuel bills.

Households face cuts of as much as 12% in the amount they can borrow — or £75,000 for someone with an income of £100,000 who wanted a £625,000 loan — after Alliance & Leicester changed its terms last week.

HBOS and Abbey also confirmed they have changed the amount they will lend to reflect spiralling household bills.

The moves confirm fears that banks will continue to restrict lending even though there are signs the rate squeeze is easing.Last week, Abbey and Nationwide cut rates on some fixed-rate and tracker loans by up to 0.27 percentage points, as the wholesale markets stabilised.

Despite this, lenders admitted in the latest Bank of England credit conditions survey that they expected to demand bigger deposits from borrowers, and subject them to more stringent credit scoring.

Under A&L’s changes, those earning above £40,000 a year with no outstanding loans, who were previously able to borrow a maximum of 6.25 times income, will be restricted to 5-5.5 times their annual income, acording to Savills Private Finance.

A&L said: “The cost of fuel and food has been rising — these changes reflect that. But these tweaks do not change the fact that A&L is a great place to get a mortgage.”

Food prices have soared 9% in the past year, says the Office for National Statistics.

Melanie Bien of broker Savills Private Finance said: “Lenders are starting to factor in rising living costs when calculating what a borrower can afford. But with prices continuing to rise, a reduction of £20,000 to £30,000 in the amount you can borrow is going to make it even more difficult to get a big enough mortgage — particularly if the borrower requires a bigger deposit too.”

The latest Bank of England figures on average mortgage rates also show how lenders continue to boost their margins at the expense of borrowers. The average two-year tracker in May was 6.17% — a margin of 0.35 points above Libor, the rate at which banks lend to each other, at 5.82% for the month. This is a rise from April when trackers averaged 5.99% — just 0.08 points above Libor.

Even borrowers with large deposits or a lot of equity in their homes have faced a hike in rates over the past month, according to the Bank of England data. The average two-year fix in April for loans amounting to 75% of the value of the property was 6.06% — rising to 6.26% in May.

Vicky Redwood of Capital Economics, a consultancy, said: “Lenders rejected a higher proportion of mortgage applications in the second quarter than in the first, and they expect to increase the rejection rate again in the next three months.

“Mortgage rates may be close to a peak, but lending criteria are still expected to tighten.”