Slight rise in home loans amid the gloom

Lending for house purchases rose slightly in May, but new loans for remortgaging fell steeply, suggesting that borrowers coming to the end of fixed-rate mortgage deals are finding it hard to switch to comparable rates.

The number of loans to buy homes is closely watch- ed because it is viewed as a gauge of demand that can underpin the sagging housing market.

These loans rose by 4 per cent in May to 52,700, and by 2 per cent by value, compared with the previous month, according to the latest data from the Council of Mortgage Lenders. However, the loan volume was still 44 per cent down on May 2007.

New loans for remortgaging dropped by 14 per cent, with just 71,000 people switching to a new deal - the lowest level since December. The figure includes only those borrowers who moved their loan to a new lender, rather than those who could not remortgage and simply moved to the standard variable rate offered by their original lender.

Anecdotal evidence suggests that borrowers whose fixed-rate mortgages are coming to an end may be finding it tougher to refinance their loan as lenders insist on a greater equity cushion, lower multiples of loan to income and better credit histories. The tougher lending criteria may partly explain the relative decline of interest-only mortgages extended to buyers with no clear route to repayment other than a house sale. At 16 per cent of all mortgages, these were at the lowest level in nearly two years.

But economists warned against reading too much into the data, which are not adjusted for seasonal fluctuations and are often volatile. Nevertheless, they offer a window on developments within a key part of the economy which can, in turn, affect consumer confidence.

The data also show affordability of mortgages appears to be improving slightly. First-time buyers borrowed 3.3 times their income, compared with 3.39 times income in July of last year.

But the rise in mortgage interest rates appears to be taking its toll. Although the average spent on interest as a percentage of income was the lowest so far this year, at 17.9 per cent, it remained more than in the first half of 2007 when Bank rates were higher than they are today.

The percentage of loans to those buying properties to let or withdrawing more equity from their homes remained fairly strong at 29 per cent of all advances in May, in spite of concerns that such loans may carry more risk for lenders.

The data came as Firstplus, a division of Barclays bank, said it would stop ex-tending "second charge" loans to new customers from August. Second charge loans increase the original size of a homeowner's mortgage.