Home loans surge will ensure fifth interest rise

Mortgage lending by the banks reached £19.7 billion last month, up by £2.5 billion on April and by £900 million on May 2006.

Some analysts fear the increase in borrowing could cause the property market to surge out of control.

In an attempt to cool things down, the Bank of England is expected to raise the base rate of interest to 5.75 per cent next Thursday.

It is also likely to push up rates again to 6 per cent later in the year.

But the interest rises will pile on more pressure on homeowners with variable rate mortgages, who can expect yet more increases in their monthly repayments.

The base rate has already risen by a quarter point four times over the past year, taking it to a six-year high.

That has added around £80 a month to the cost of a £125,000 repayment mortgage.

Further rises will inevitably tip the budgets of millions of households into the red, causing an increase in bankruptcies and repossessions.

Many economists also point out that the interest rate rises over the past year do seem to have cooled down the housing market.

The banks agreed some 204,800 mortgages and loans secured on homes in May, which was only 2 per cent up on the same month last year.

The number of loans specifically for house purchase was 77,443, which is the highest figure this year but below the 80,298 in May 2006.

Analysts at the Royal Institution of Chartered Surveyors yesterday said that a rate rise next week is a certainty nonetheless.

Oliver Gilmartin, a senior economist at the Institution, said: "The latest lending figures confirm Monetary Policy Committee concerns that the housing market has been resilient in 2007, making a further rate hike guaranteed in July.

"Many indicators point to a slowing housing market in recent months with house price inflation expected to slow sharply into the Christmas period."

Seema Shah, of analysts Capital Economics, said there were already clear signs that the housing market is slowing.

She pointed out that buyers simply do not have the income to pay skyhigh prices.

"With affordability already under intense strain, the further interest rate rises that we expect will only make matters worse," she added.

"Mortgage demand is still likely to cool considerably over the second half of 2007. The signs are still pointing to cooler mortgage lending in the coming months.

"With interest rates likely to hit 6 per cent this year, affordability and buyer confidence will only deteriorate further."

The mortgage lending figures were published by the British Bankers Association, which said there is also evidence of belt-tightening among consumers.

Spending on credit cards dipped to £7.41 billion in May, a fall of 3.4 per cent on the same month last year.

Total credit card debt with the banks fell by £409 million to £29.5 billion.

The total outstanding debt on overdrafts and loans also fell by £54 million to £76.3 billion.

The association added that the scale of the increase in mortgage lending is partly because the banks captured a greater market share from building societies in May.