Mortgage lending dropped in December to a near three-year low as appetite fell among buyers for expensive homes in London and the south-east.
The Bank of England said mortgages for house purchases were the weakest since January 2015 at 61,039, down by almost 6%, and remortgaging approvals fell by 14% to 46,475.
The house purchase figures coincided with a report showing sellers in some parts of London are discounting their prices by as much as 10% to secure a sale.
Oxford, Cambridge and Aberdeen were also highlighted as cities hit by house price discounting, according to the Hometrack Cities Index. This was in contrast to the rest of the UK, which maintained solid house price growth.
Howard Archer, the chief economic adviser to the EY Item Club, said December’s marked drop in mortgage approvals suggested that housing market activity, already under pressure from an inflationary squeeze on disposable incomes and Brexit uncertainty, took a further hit from the Bank of England raising interest rates in early November.
“We expect 2018 to be a very challenging year for the housing market with activity likely to be lacklustre and house price rises limited to 2%,” he said.
Remortgaging rose strongly around the rate rise as homeowners sought to lock in low rates for several years, mortgage experts said.
The figures coincided with a warning from the City regulator that borrowers with interest-only mortgages were in danger of losing their homes.
The Financial Conduct Authority said almost one in five mortgages were interest-only or only partly repaid each month and many homeowners could find they are unable to make up the shortfall when the term of their mortgage expires.
Following a review in 2012, regulators warned that the interest-only mortgage market was a “ticking time bomb” after it helped to fuel a housing boom before the 2007-09 financial crisis.
Jonathan Davies, the watchdog’s executive director of supervision, said that while good progress has been made in reducing the number of people with interest-only mortgages, the FCA was still “very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes”.
There are currently 1.67m full interest-only and part-capital repayment mortgage accounts outstanding in the UK, or 17.6% of all home loans.
The latest review shows that in the first half of 2017 almost 26% of customers with interest-only and part-capital repayment loans were from lower income groups.
The Bank of England’s lending figures also showed that consumers are relying increasingly on short-term loans, fuelling concerns that low-income families are relying on credit cards and loans to make ends meet.
Consumer credit net lending was £1.5bn in December, pushing the growth rate up to a four-month high of 9.5%.
Archer said: “The Bank of England will be disappointed with the rise in consumer credit growth and will be hoping that it is just a temporary blip with the softening trend resuming in 2018.
“In its November financial stability report the Bank of England again warned that rapid growth in consumer credit has created a “pocket of risk” and the bank has also warned that banks risk becoming complacent in their lending behaviour.
“It may be that squeezed households borrowed more in December to enjoy Christmas although retail sales data for the month were soft,” he said.
A recent study by the FCA found that £9 of every £10 of outstanding credit card debt in November 2016 was owed by people who were also in the red two years earlier.
The BoE’s credit conditions survey for the fourth quarter of 2017 showed that lenders expected a significant decrease in the availability of unsecured credit in the first quarter of 2018.