mortgage lender Northern Rock brushed aside concerns about the tougher housing market yesterday as it forecast profits in line with expectations and said credit quality remained healthy.

The Newcastle bank told investors that the strong lending performance seen in the first half of the year had continued into the third quarter.

Total lending during the nine-months to September 30 was up 17 per cent on the year, driven by growth in property-secured loans. Remortgaging accounted for about 45 per cent of all gross lending during the first three quarters, as more customers chose to raise money by making equity withdrawals. With Northern continuing to keep tight control of costs, the company said it was comfortable with City expectations for annual profits of between £468m and £509m, with the average forecast of £494m representing a 12 per cent improvement on last year's results.

The bank also sounded a reassuring note on credit quality, saying that mortgage arrears remained at half the industry average, unchanged from the first half of the year.

Northern said that with unemployment remaining historically low, and with UK economic growth expected to reach about two per cent this year and next, the outlook for credit quality and lending growth remained favourable.

Chief executive Adam Applegarth said: "The robustness of our business model means we are again set to deliver on all our strategic targets in 2005 and we remain confident on the prospects for 2006."

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: "Having realised ahead of its banking peers that the days of the one-mortgage- for-life are over, Northern Rock continues to build scale in an aggressively competitive re-mortgaging market.

"At the same time, it is not losing sight of its core values in offering value for money products via a cost conscious distribution network."