Borrowers who buy properties to let are propping up the housing market as conventional demand for mortgages falls, new figures showed today.

Lending to buy-to-let investors and other nonconventional borrowers rose by 37 per cent in the year to August, the Council of Mortgage Lenders (CML) said.

The industry body said that the market was being underpinned by house price increases, tenant demand, rent increases and landlords’ willingness to take long-term investment decisions.

However, loans for house purchase — typically seen as a good forward indicator of house prices — fell back by 11 per cent to a total of 99,000 in August from 111,000 a year ago.

That will add to expectations that the housing market is due to slow in the coming months, which have been heightened by reported one-month falls in prices and concerns over the impact of the international credit squeeze.

The number of loans for remortgaging also fell by 12 per cent year on year, the CML said.

Overall, that meant that the size of the mortgage market was little changed in August.

Gross lending stood at £34 billion, compared with £34.1 billion in July and £33 billion in August 2006, the data showed.

Affordability continued to worsen, the CML said, with first-time buyers typically borrowing 3.38 times their income, while the proportion of income they spent on interest rose from 19.7 per cent in July, to 20 per cent.

Michael Coogan, the CML director-general, said: “Affordability clearly remains challenging but there may be some relief for borrowers with expectations of an interest rate cut, perhaps as early as November.

“We are set to have a very segmented market for some months to come. The sub-prime sector is still facing funding constraints, while mainstream fixed-rate deals have begun to get cheaper.

“As lenders move to price for the risk they are taking on, mortgages are set to become more expensive for customers who have poorer credit histories.”

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