Paragon is close to announcing it will be the first UK mortgage lender to undertake a hugely discounted rights issue because of the credit squeeze.

In a move that will spark renewed fears about smaller UK mortgage lenders, Paragon is being forced to raise ?280m from investors because the corporate loans it normally used have become more expensive.

The UK's third-largest buy-to-let lender relies entirely on the wholesale markets to finance its mortgage lending but has been unable to do a securitisation in recent months as the capital markets are virtually closed.

Paragon's rights issue - which could come as early as today - is thought to be about 20 shares for one. The move also means that Paragon is expected to curtail its mortgage lending in future.

Paragon warned last November that it was finding it difficult to refinance a ?280m corporate loan facility used for working capital which expired in February.

It said at the time it had arranged a stand-by rights issue of ?280m, underwritten by UBS, but said it would look at alternatives such as issuing senior corporate debt.

Paragon's shares have plunged by 78 per cent in the past year and closed last night at 102p. Last night the company declined to comment.

The move comes at a time when the housing market is slowing and as the crisis around Northern Rock, which was forced to borrow from the Bank of England, continues.

Paragon's new buy-to-let lending was expected to halve in the six months to the end of March 2008 compared with the same period in the previous year.

There is evidence that amateur buy-to-let investors who entered the market to catch rapidly rising property prices are starting to sell up while some professional landlords are reducing the size of their portfolios in the expectation that prices will fall.

Paragon's pre-tax profits in the year ended September 30 rose 10 per cent to ?91m against ?82.8m last time and it will hold its final dividend.