Mortgage approvals hit record high ahead of rate rise

The housing boom goes on but spenders may be about to turn to savers as increased borrowing costs sap confidence

Mortgage lending surged in the run-up to this month's increase in interest rates as homebuyers rushed to grab a share of historically cheap money, Britain's leading banks said yesterday.

Mortgage lending surged in the run-up to this month's increase in interest rates as homebuyers rushed to grab a share of historically cheap money, Britain's leading banks said yesterday.

The number and value of mortgage loans approved in October rose to a record, the British Bankers' Association said. But analysts said an unexpected fall in confidence after the rate hike, revealed in separate figures yesterday, indicated households might be about to slash their spending plans - something that would ring alarm bells at the Bank of England.

Analysts are now anxiously awaiting the latest house price figures from Nationwide building society this morning that will be the first measure of the impact of higher rates on the housing market.

The UK's biggest banks approved a total of 270,500 mortgages during the month, collectively worth £19.6bn. This was 23 per cent higher in value and 10 per cent higher in number than October 2002.

The increase was led by a 27 per cent annual leap in mortgages for house purchase, compared with a 24 per cent rise in remortgaging.

David Dooks, director of statistics at the BBA, said: "These data show no signs of the mortgage market slowing down. Higher numbers of loans approved for house purchase and re-mortgaging were consistent with the current strength of the housing market."

The BBA showed a slowdown in credit card borrowing and a net repayment of bank overdrafts. But this was offset by a record £2.2bn of mortgage equity withdrawal - where homeowners borrow against the value of their property to fund spending - an annual rise of 30 per cent.

The figures are the latest to point to a renewed surge in housing market activity over the autumn. Nationwide said the average price rose 2 per cent in October, while estate agents have reported signs of a return of gazumping to London.

The Bank's monetary policy committee cited the strength of the housing market when it raised rates earlier this month for the first time in almost four years. Since then Mervyn King, the Governor, has sought to play down fears the Bank is targeting the housing market, saying it does not believe a drop in prices would have a serious impact on the overall economy.

Mr King and Charlie Bean, the Bank's chief economist, have, nevertheless, hinted the MPC will raise rates only gradually to monitor the impact of higher borrowing costs on consumers.

The first survey of consumer confidence since the rate hike showed the mood of households darkened unexpectedly last month. A closely watched index of optimism fell to its lowest level since the start of the Iraq war and the aftermath of the 11 September 2001 attacks.

Consultants Martin Hamblin GfK said Britons became gloomier about the economic outlook and less likely to make a major purchase in November. Roger Wright, a director of Martin Hamblin GfK, said: "The increase in interest rates has probably affected how consumers perceive whether it is the right time to make purchases."

In contrast, households believe it is now a good time to save and are more likely to stash money away than at any time since May 2001. Analysts believe a sudden shift towards savings could pull the rug under the economy if consumers no longer feel happy to support growth by spending and borrowing.

John Butler, a UK economist at HSBC, said: "The tone of this survey is extremely interesting and raises question marks again about the health and vulnerability of the consumer. The deterioration probably relates to the rise in rates and the fear it is the start of many. If it persists it is consistent with a consumer that intends to save rather than spend."

Economists said the impact on confidence would add to the MPC's eagerness not to shock consumers with sudden or large rate rises.

A large majority of 45 economists polled by Reuters this week said the MPC would leave rates on hold next week - a sentiment reinforced by the confidence figures.

Simon Rubinsohn, the chief economist at Gerrard fund managers, said: "The response of consumers in the survey highlights the dangers posed by the prospect of higher base rates."

However, Richard Iley, UK economist at ABN-Amro bank, said although pessimism was growing about the state of the economy, people's perceptions of their finances had actually improved.