London Housing: First-Time-Buyers Taking on Bigger Mortgages as Property Prices Spiral

Mortgage lending to first-time-buyers in London has shot up by 49% in value as they bear the brunt of the city's spiralling house prices.

The Council of Mortgage Lenders (CML) said in its quarterly report that home loans for London property totalled £2.7bn during the first quarter of 2014, a rise of 49% on the same period a year before.

There were 11,900 loans taken out in the city by first-time-buyers during the quarter, a 29% annual rise.

Borrowers in the English capital are taking on ever-larger mortgages because house prices are leaping off the back of growing demand and a severely constrained supply.

Ultra-low interest rates, a recovering economy and the Help to Buy scheme are fuelling mortgage demand.

And extra pressure on London's housing supply is put on by heavy foreign investment, as overseas investors chase the rising rent yields and capital gains in the lucrative property market.

According to the Office for National Statistics (ONS), the average price of a London home was £459,000 in March 2014 after jumping 17% over the year. That compares to an 8% rise in the UK average as a whole, which hit £252,000 in March.

"We are increasingly looking at not one overall UK housing market, but many smaller regional markets with different characteristics, and Greater London has particular challenges," said Paul Smee, director general of the CML.

"Affordability remains a crucial factor and policymakers need to be aware that any measures they implement may have different effects in different locations."

Some property market watchers have raised concerns about the risk of a credit bubble forming because mortgages are so cheap.

They are worried that when the Bank of England hikes interest rates again, which is likely to happen in 2015, it may tip the balance for some homeowners and make their mortgage repayments unaffordable.

As house prices rise and people take on bigger debt to buy a home, particularly in London, the mortgage becomes less affordable and the risk of default is greater.