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Mortgage lending strengthens despite Bank of England base rate warning

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A mortgage price war that has brought the cost of monthly payments down over the past year is expected to continue until at least next month, despite warnings that lenders’ profit margins could be squeezed by a hike in the Bank of England’s base rate.

Industry figures showed that in the third quarter of the year, mortgage lenders offered lower interest rates than the previous quarter and were willing to accept a larger number of applications from buyers with small deposits.

High street and online lenders said they would be increasing the supply of mortgages in the three months to the end of November after an increase in the supply over the previous quarter.

The Bank of England’s credit conditions survey found that the demand for mortgages to buy a house fell in the third quarter and was likely to fall again in the fourth, but remortgaging was likely to more than offset the fall in new mortgages.

A balance of 18.3% of mortgage lenders anticipated a further easing in credit conditions in the fourth quarter, slightly higher than the balance of 15.3% reporting that credit conditions eased in the third quarter. Survey results are based on a weighted balance of responses from lenders that gives a higher rating to those that say they are very likely to ease conditions, compared with those that say a modest easing is likely.

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Lenders saw an improvement in the outlook for the economyand house prices, and their increased appetite for risk, as reasons to ease lending standards in the coming months.

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The mortgage industry has been engaged in a price war since last summer, when the government cut the stamp duty tax on purchases below £500,0000, which meant a saving for a buyer of up to £15,000.

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The subsidy was largely withdrawn in June and the previous surge in buyers began to dry up. The market recovered in August, though at a more modest rate of growth than in the previous year.

Andrew Wishart, property economist at the consultancy Capital Economics said: “Unsurprisingly, given the end of the stamp duty holiday in September, demand for mortgage lending dropped back. That reflects the surge in home moving in the summer abating. But we think that loosening credit conditions and limited stock will continue to support house prices.”

He added that recent concerns about an early rise in the Bank of England’s base rate from 0.1% to 0.25%, possibly at the December meeting of the monetary policy committee, was likely to be absorbed by lenders, maintaining the current level of activity in the mortgage market and the low level of mortgage interest deals.