Mortgage lending rises despite rate increases

Mortgage lending increased at its fastest pace for three months in June, defying expectations that the housing market is slowing down in the wake of soaring interest rates.

Figures from the Bank of England revealed yesterday that £31.9bn was advanced during the month. Once redemptions and repayments were stripped out, net lending rose by £9.55bn. This followed an £8.75bn rise in May.

The number of new mortgages approved also held up during June despite the higher cost of borrowing. Although economists expected them to fall, mortgage approvals - a key indicator for the housing market - numbered 114,000 for the second consecutive month.

The Bank's Monetary Policy Committee will meet this Thursday to decide whether to keep rates on hold at 5.75 per cent - the highest rate in six years. Economists are predicting that rates will stay the same but argue that, if there is not strong evidence of a slowdown in the market, rates could rise to 6 per cent later in the year.

However, yesterday's data ran counter to figures reported by the British Bankers' Association, which showed net lending by the major banks rose by only £5.06bn in June, down from May's rise of £5.83bn and a recent monthly average of £5.3bn.

The Council of Mortgage Lenders said total advances reached a record £34.2bn during the month. But it claimed the figure was driven by large numbers of people remortgaging after two and three-year fixed-rate deals came to an end, and it added that net lending was likely to be much more subdued.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, expects the market to slow down. "The volume of mortgage approvals may have proved more resilient than expected in June but, as recent interest rate increases get fully passed through into borrowing costs, we expect to see more evidence of a cooling in demand for property," he said.

Howard Archer, chief UK and European economist at Global Insight, saidthe data does not greatly alter the overall impression that the housing market is gradually losing momentum "as higher interest rates start to bite".