Northern Rock, Britain’s fifth largest mortgage lender, has said that house prices could slow down dramatically in the next six months. The annual increase to June was just over 10%, but Northern Rock reckon that the annual rate could come down to as low as 4% by the end of the year.

Problems will start to arise when the households with two and three year fixed rate deals come to an end over the next twelve months or so. So far only around a third of borrowers have actually been affected by the five interest rate rises we have seen in the last twelve months. That leaves an awful lot to feel the force – and will it all come at once when they look for a new deal, as their existing deal is probably less than 5%. A new deal will more likely be around 6%.

As people remortgage their spending power will reduce and this will have the effect of dampening the housing market. The remortgage market, of course, will get a nice boost.

London price have continued to rise, but the rest of the country’s house price inflation has slowed down and is probably down around the 4% already.

Northern Rock issued a profits warning in June, but boosted its dividend this week by 30%, up to 14.2p for its first half, and suggested that there would be a similar pay-out for its final dividend. Although first-half profits went up by 29% to reach £224m, the group said again that over the full year and into next year growth would only be 15%.

Northern Rock borrows its money on the wholesale market, meaning that margins are squeezed when interest rates rise, but borrowers stay on lower fixed rate mortgages. As a comparison, HBOS funds most of its mortgage lending from savings.

Northern Rock’s ability to retain 85% of customers when their fixed-rate mortgages come up for renewal should secure further growth into the future.