The era of cut price mortgages is over, senior Treasury officials have said, as consumers were warned that the credit crisis will affect Britain for at least another year.

As the American Federal Reserve took the drastic step of cutting interest rates by three quarters of a percentage point to combat the deepening financial downturn, homeowners were told by civil servants to expect continuing turmoil until 2009.

The Fed’s move – the second such drop this year – came amid further signs that British householders are already experiencing significant strain as a result of increasing bills.

The US Treasury Secretary Henry Paulson – who held talks on Tuesday with Alistair Darling, the Chancellor – admitted that the American economy is facing a ‘sharp decline’.

Further evidence of the worsening state of British finances emerged as it was disclosed that:

• Tens of thousands of credit card holders have had their credit limits slashed by lenders

Rising mortgage costs have forced millions of people to seek help to meet the costs of their household bills

• Inflation is now running at the highest rate since June last year affecting the chance of the Bank of England cutting interest rates

The fears of millions of homeowners that their mortgages are about to get more expensive were confirmed by Dave Ramsden, the managing director of macroeconomic policy at the Treasury.

Mr Ramsden revealed that the Government was not expecting the premium over the Bank of England base rate charged by lenders to drop to the level enjoyed by consumers last year before the credit crunch hit.

Official figures show that a typical homeowner with a £200,000 mortgage now has to pay £460 a year more for their loan as a direct result of the credit crunch.

The so-called “credit crunch premium” is added by banks and building societies nervous about lending money and was previously thought to only be a temporary measure.

Mr Ramsden told the Treasury Select Committee that the Government was grappling with a “period of exceptional uncertainty” – the type of which he had not seen in the past 15 years.

“On the credit position, what we have assumed is what we call a normalisation of conditions by mid 2009. And with a start in that normalisation from the end of this year,” he said.

“When we talk about normalisation we are not saying we think the interest rate spread over the bank rate will go back to the conditions of last May or June. But we do think it will go back from the very heightened level of the spread that we see at the moment