Northern Rock brushed aside concerns about the state of the housing market as it reported a 42 per cent surge in residential mortgage lending during the first quarter.

With a £6.1 billion pipeline of lending business, 19 per cent ahead of the same period last year, a confident trading update from Northern Rock today means it is on track to overtake Lloyds TSB and the Spanish-owned Abbey to become the UK's third-biggest player in the mortgage market.

The UK's eighth-largest bank, led by the chief executive Adam Applegarth, said that its total lending during the first three months of the year was 34 per cent higher than the first quarter last year.

And despite January's surprise increase in interest rates - and against predictions of a further rise as early as this week - the bank said that it was "comfortable" with forecasts that it could grow profits by about 18 per cent to nearly £435 million this year.

"We have started 2007 strongly, with lending performance well ahead of the comparable period last year and a strong pipeline of business set to deliver asset growth in the top half of our strategic range," Mr Applegarth said.

The bank added that it expected the gross mortgage market to increase to more than £360 billion this year, up from last year's £345 billion. Northern Rock said that it remained confident of hitting all of its targets.

Shares added 5p to 1150p, valuing Northern Rock at £4.9 billion.

Northern Rock has been gradually adding market share in the mortgage market, making a point of offering exactly the same deals to its "back book" customers as to new arrivals. It has also benefited from its steady approach to mortgage lending, together with a conservative approach to the buy-to-let market.

In the wake of a results season last month that was littered with references to bad loans, Northern said that its loan arrears of more than three months remained at less than half the industry average of 0.89 per cent.

James Eden, banks analyst at Dresdner Kleinwort, said: "Today's statement reconfirms that credit quality is absolutely the wrong issue to worry about: mortgage arrears are stable at below half industry average and Northern Rock's forecast of a gross market of £360 billion 2007 looks low."

Northern said that its risk profile was consistent with last year and that unsecured lending represented just 8 per cent of lending assets.

Strong mortgage lending figures and robust recent retail sales have increased the chances of an interest rate rise on Thursday, which would take the cost of borrowing to a six-year high.

Northern's trading update came as latest Bank of England figures showed that mortgage equity withdrawal rose by £2.4 billion to £14.6 billion during the fourth quarter, compared with £12.2 billion three months previously.

The Bank, which revised the figure upwards from its previous estimate of £11.8 billion, said that mortgage equity withdrawal as a proportion of net income rose to 6.7 per cent from 5.5 per cent.

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