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U.K. banks approved the fewest mortgages in four months in August as borrowing costs increased, a sign demand from buyers in the residential property market may start to slow.

Lenders granted 109,000 loans for house purchase, the least since April, the Bank of England said in London today. Economists forecast 110,000, according to the median of 24 estimates in a Bloomberg survey. House prices stagnated in September for a second month, a separate report showed.

Borrowing rates for home loans are rising after the central bank lifted its main interest rate to a six-year high in July and credit costs surged, forcing a bailout of mortgage lender Northern Rock Plc last month. Today’s report adds to signs that the property market is cooling as consumers pay back a record 1.4 trillion pounds ($2.9 trillion) of debt.

“There are plenty more drops to come,” said Alan Clarke, an economist at BNP Paribas in London. “This is entirely due to higher interest rates. We see the Bank of England staying on hold.”

The net value of lending secured on homes fell to 8.5 billion pounds, the lowest since February 2006, the central bank said. Overall net lending dropped to 9.5 billion pounds from 10 billion pounds in July.

Other Borrowing

Britons borrowed 10 billion pounds against the value of their homes in the second quarter, the least since the third quarter of 2005, the bank said today in a separate report. So- called housing equity withdrawal fell to 4.5 percent of post-tax income from 6 percent in the first three months of 2007.

“The marked retreat in housing equity withdrawal in the second quarter indicates that higher mortgage rates and increasing doubts about future house-price strength is diluting the attractiveness of such action,” said Howard Archer, an economist at Global Insight in London.

Higher rates may hamper household spending after a U.S. housing slump sparked a global credit squeeze. The London interbank offered rate that banks charge each other for three- month loans in pounds reached as high as 6.904 percent on Sept. 11, the widest gap from the central bank’s benchmark rate in at least two decades. The rate was at 6.3 percent on Sept. 28.

Banks such as Abbey, the second-largest U.K. mortgage lender, are passing the higher rates onto their customers. The average rate on a mortgage fixed for two years, the most popular type, rose to a seven-year high of 6.58 percent in August for borrowers with a 5 percent deposit on their homes, the Bank of England reported Sept. 11.

House Prices

The housing market has shown mixed signals since the onset of the credit slump. Prices rose 0.7 percent in September, the fastest pace in three months, Nationwide Building Society said Sept. 27. A separate Hometrack Ltd. survey released today showed average house prices stayed unchanged at 176,300 pounds ($358,000) in September.

Consumer spending has boosted U.K. expansion and has yet to show signs of slowing. Gross domestic product growth quickened an annual 3.1 percent in the second quarter, putting it on course for the best performance in three years, a government report showed Sept. 26. Consumption rose 0.8 percent in the period, the most since 2006.

Consumer confidence still fell to the lowest in six months after a run on Northern Rock, which sought a bailout from the central bank, a GfK NOP Ltd. survey showed Sept. 28. Only a government guarantee ended the panic, which led former policy maker Richard Lambert to liken Britain to a “banana republic” in a Sept. 26 speech.

Net consumer credit fell to 1 billion pounds in August from 1.1 billion pounds the previous month, the central bank said. Net credit card lending rose by 75 million pounds, the least since May. Borrowing on personal loans and overdrafts increased by 928 million pounds, the most in three months, today’s report showed.

Policy makers will keep the benchmark rate unchanged at the current 5.75 percent on Oct. 4, according to the median forecast of 60 economists in a Bloomberg News survey.

This entry was posted on Friday, October 5th, 2007 at 3:31 am and is filed under Mortgage. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.