Mortgage lending reaches a record high

The Bank of England issued a warning yesterday over the recent surge in consumer borrowing as new figures showed mortgage lending hit a record high last month.

Britons borrowed £25bn in July - equivalent to £1bn for every working day and an increase of 12 per cent or £2.7bn since June, the Council of Mortgage Lenders (CML) said. The figures will add to fears that the Bank's policy of cutting interest rates is encouraging householders to take on unsustainable levels of debt.

Yesterday, the Bank detailed its concerns over the debt mountain in the minutes of its monetary policy committee meeting held two weeks ago. At the meeting it voted unanimously to keep rates unchanged at 3.5 per cent. "The rapid growth rates of lending to individuals, which has helped to maintain consumption growth [cannot] be sustained indefinitely," it said.

There was a risk that households were banking on large increases in their income and might also have forgotten that inflation would not erode their debt over time as it had done in the 1970s and 1980s. It said the scale of the debt burden meant they might cut their spending plans if there was an economic shock such as a house price crash or a global slump. The Bank said the record levels of lending did not, by themselves, imply that the size of the debt mountain was "necessarily unsustainable or imprudent".

Loans for house purchases jumped 20 per cent on the month to £11.6bn, while remortgaging - where buyers swap their lender to get a better deal - was 5 per cent higher at £10.7bn. Neither figure was a record, meaning the key factor behind the record jump was a surge in existing homeowners taking out extra mortgages on their property.

This type of borrowing - "mortgage equity withdrawal" - worries economists because it means homeowners are increasingly exposed to a slump in house prices. But the CML repeated its view that there was not a serious risk of a crash while interest rates and unemployment were at their lowest levels for decades.

"We do not anticipate any shocks to the market that would cause serious problems," Michael Coogan, director general of the CML, said. "July's figures support the picture of a housing market that remains stronger than expected."

Separate figures showed that lending by the big high street banks rose by £5.5bn in July, compared with June's increase of £5bn. Roger Brown, executive director of the British Bankers' Association, said: "The major banks' lending was buoyant in July."

Independently, the Building Societies Association released data showing approvals - loans agreed but not yet made - stood at £4.1bn, compared with £3.8bn in June.