Market News

Banks and building societies have cut back mortgage lending at the sharpest rate since the depths of the first lockdown amid fears of a recession.

More banks reined in home loans than offered easier money in the three months to June, the Bank of England’s quarterly survey found.

The drop in mortgage lending was the most dramatic since 2020, when the onset of Covid-19 and lockdowns brought the property market to a standstill.

It marks a sharp turnaround from last year when banks were enthusiastically lending. That trend only came to an end at the start of this year after the Bank of England’s first interest rate hike in December and Russia's invasion of Ukraine in February.

Lenders said deteriorating prospects for the economy was the main factor making them more cautious on lending to house buyers, with tighter conditions in financial markets and signs of nerves over house prices also contributing to the slowdown.

Demand from buyers kept on growing strongly in the second quarter of the year, reversing much of the slump in late 2021 that followed the end of the stamp duty holiday.

But lenders expect demand to tail off over the summer. The Bank of England has raised its headline interest rate from 0.1pc in December to 1.25pc last month. Further sharp increases are expected in the coming months.

Jeremy Leaf, an estate agent in North London and former residential chairman of the Royal Institution of Chartered Surveyors, said house prices are still holding up due to a shortage of properties for sale.

“Still unsatisfied demand is shrugging off concerns about the cost of living and rising interest rates,” he said.

“But we know, on the ground, that the market is changing as transactions are reducing and lengthening. Lack of choice is continuing to underpin pricing.”

Average house prices hit a new record high of £281,000 in April, according to the Office for National Statistics, up 12.4pc on the year.

At the same time higher borrowing costs are putting pressure on banks to cut back the provision of credit cards and other consumer loans, which slowed down in the second quarter and could go into reverse in the coming three months, just as the cost of living crisis intensifies.

Lenders expect to approve a smaller share of credit card applications in the third quarter, the Bank of England found.

Sarah Coles at Hargreaves Lansdown said “demand for debt flourished this spring, as price rises ran rampant” but lenders are increasingly wary of the risks as the economic situation worsens.

“Unfortunately it means people risk building up even bigger problems further down the track, which is one reason why the banks are toughening up,” she said.