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Mortgage lending swelled to a seven-year high over the summer as low interest rates drove demand for home loans and a surge in buy-to-let lending underlined the desire for property as an investment class.

Gross mortgage lending reached £20bn in August, a 12 per cent rise on the same month in 2014, and the third month of year-on-year growth, the Council of Mortgage Lenders said.

Bob Pannell, CML chief economist, said: “Mortgage lending is currently enjoying its best spell since 2008, on the back of a pick-up in house purchase and remortgage activity over the summer months.”

Loans for buy-to-let have risen more steeply than other forms of lending. Some 25,200 buy-to-let mortgages were taken out in July, 14 per cent up on June 2015 and 39.2 per cent higher than July last year. At £3.8bn, the value of this business was 11.8 per cent up on June and 52 per cent higher than in July 2014.

Cheap debt is one factor, as lenders vie to offer record low fixed-rate deals to attract new customers and boost remortgage business. The number of buy-to-let mortgage products on the market has ballooned this year to more than 1,000, according to comparison site Moneyfacts — the highest number for seven years.

Rising house prices across the country have also stoked demand, as investors eye the potential for capital appreciation. The Halifax house price index last week put the annual increase in prices at 9 per cent, with prices in the past three months riding 3 per cent higher than in the previous quarter.

Some in the industry have cited another factor: the money released from pension pots under new freedoms introduced in April. Over two-thirds (70 per cent) of mortgage brokers surveyed by Nottingham Building Society believed the pensions revolution would fuel demand for buy-to-let.

But Steve Olejnik, sales director at buy-to-let broker Mortgages for Business, downplayed claims that pension pot money was pouring into buy-to-let, pointing to the constraints imposed by average pot sizes of between £20,000-30,000. “If you can only take 25 per cent of your pot as a tax-free lump sum it’s not going to buy you a lot of property.”

Mr Olejnik said most of the surge was down to professional landlords with multiple properties rushing to refinance their loans at better rates or taking on new borrowing, rather than one-off investors. “They’ve come back to the market. A lot more are fixing. They know an interest rate rise is round the corner and they’re locking into fixed rates now.”

The latest upswing in buy-to-let lending is sure to be noted by regulators. The Bank of England in June said it would keep a close eye on a sector in which lending “could pose a risk to financial stability”. Landlords were competing with individuals for the same pool of properties, yet the former enjoyed looser lending criteria, it said.

If house prices dropped sharply, landlords might make matters worse by selling into a falling market. Conversely, their rising market share threatens to raise indebtedness and exacerbates worries over housing affordability, the Bank’s financial stability report said. Interest rate rises would only amplify the problem.

George Osborne has already moved to douse the buy-to-let euphoria in his July Budget, announcing a gradual phasing out of tax relief on mortgage interest payments from April 2017, and doing away with the annual “wear and tear” allowance from which landlords had benefited.

Mr Olejnik said there had been initial panic among landlords over the chancellor’s sortie — “the phone rang off the hook” — but this had given way to a more phlegmatic mood. “They realised it was a gradual thing and there are more options for landlords borrowing in a limited company name. The professionals aren’t worried about it.”

In spite of the growth in buy-to-let, first-time buyers made up 45 per cent of total house purchase lending in July, far higher than the 30 per cent share they accounted for pre-crisis, the CML said. Buy-to-let, by contrast, took up 18 per cent of the lending market.

Paul Smee, CML director-general, said he expected the overall growth in lending levels to continue. “The market has shown steady growth in house purchase and buy-to-let over the past few months, with a general improvements in economic factors across the UK allowing more people to enter the property market.

“This positive direction of travel going into the autumn reinforces our recent revised forecasts that lending levels should continue to grow gradually over the rest of the year after a subdued beginning to the year.”