Virgin Money has provided further evidence that interest rate rises are weighing heavily on mortgage markets amid the cost-of-living crisis but may help allay concerns that a slump is in prospect.

In a trading update the Glasgow-based group said it expects housing activity to remain muted in the near term, given the implications of the interest rate increases made by the Bank of England as policymakers look to cool surging inflation.

These have prompted lenders to raise mortgage rates in a way that could make it harder for new buyers to be able to afford house purchases and result in big rises in the repayments of existing borrowers.

Virgin Money said yesterday that its mortgage balances remained broadly stable at £57.5billion in the latest quarter, against a subdued market backdrop.

The bank also noted the pressure on profitability which it has faced as a result of lower mortgage activity levels and the need to increase the interest rates offered to savers amid competition for deposits. Banks can use deposits to fund mortgage lending and reduce reliance on more expensive wholesale market funding.

The update came days after Nationwide said house prices fell at the fastest rate since 2009 in the 12 months to July. The building society said prices fell by 3.8% year on year in July.

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However, Virgin Money’s update may help ease fears that lenders face the prospect of a surge in arrears on the scale that could prompt the kind of wave of selling that fuelled deep falls in house prices amid the global financial crisis.

The group said credit quality remained broadly stable during the latest quarter, despite economic uncertainty.

Noting that expectations for unemployment remain low and the Bank of England expects the UK economy to grow modestly, Virgin Money said it is well positioned. The group proposed a £175 million share buy back programme. This was well received by investors judging by the three per cent rise in Virgin Money shares following the announcement of the plans.

Last month Bank of Scotland owner Lloyds Banking Group said rising interest rates, cost of living pressures and an uncertain economic outlook are proving challenging for many people and businesses.

However, the group said its mortgage book remained resilient. While there had been a modest increase in arrears in respect of older variable rate mortgages, totals overdue were below 2019 levels.

READ MORE: Scottish housebuilder sees shares surge as it prepares to post record sales

Royal Bank of Scotland owner NatWest Group said last week that arrears remained low but it was being proactive in offering support for those that had been hit hardest by recent developments.

In June mortgage lenders agreed with Jeremy Hunt that they would introduce measures to support mortgage borrowers, including waiting 12-months before initiating repossessions.