In contrast to the competition of recent years, lenders are increasing their rates to put off potential borrowers as the COVID-19 restrictions have left many staff working from home, limiting their capacity to process mortgage applications. 

The temporary cut to stamp duty which offers buyers a tax saving of up to £15,000 has led to a V-shaped recovery in the UK housing market since May. 

An executive at one of the UK’s largest mortgage lenders told the Financial Times that on some days recently it had been receiving more than double the number of mortgage applications it would normally be able to process. 

They said: “This is as busy as I’ve seen the market since 2008, just before the credit crunch,” the executive said. “Post-lockdown, in late May to June, we were busy, heading back towards (normal) numbers, but the stamp duty change, when that dropped, put a massive urgency into buying a home.”

This week, Metro Bank temporarily paused registrations from new brokers looking to send clients to the lender, to allow it to process its existing workload.

Halifax, TSB, Nationwide, NatWest, Barclays, and Yorkshire and Chelsea building societies are among the lenders to have raised interest rates over the past three weeks, even as the Bank of England base rate has remained at its record low of 0.1%

On Thursday, Virgin Money, the owner of Clydesdale Bank, increased its interest rates on lower-risk mortgages by 0.3 percentage points, and those at 85 per cent by 0.6 percentage point. On Tuesday, Santander increased rates on some of its 60, 75 and 85% loan-to-value deals by up to 0.35 percentage points.

Banks across the UK had already withdrawn many of their deals on low-deposit home loans earlier in the year, significantly impacting first-time buyers. However, they have now widened the scope of their action on rates. 

Hina Bhudia, partner at Knight Frank Finance, said: “What was a significant problem for first time buyers will now start affecting buyers at every level of the property ladder.”

“If you’ve secured a rate with a lender, lock it in as soon as you can because there’s no guarantee it’s going to be there tomorrow.”

Average rates on two-year fixed mortgages at 65% LTV — regarded as lower-risk borrowing — have risen from 1.66% on July 1 to 1.96% on October 22, according to Moneyfacts.

Rates on five-year fixed rates at 65% LTV moved from 1.77% to 2.19% over the same period. Raising rates is the most common method by which lenders control the amount of business they accept, but they may also toughen their credit score criteria to filter out more customers, raise minimum loan levels to deter smaller mortgage applications or restrict certain mortgages to houses, not flats.

The most effective measure is to withdraw mortgage products entirely, as Santander did this week for its 85% LTV two-year fixed purchase and remortgage products.