* Share of gross mortgage lending at 3.5 percent
* Gross mortgage lending rises 38 pct
* Net mortgage lending almost doubles (Adds CEO comments, details, updates share movement)
By Noor Zainab Hussain and Matt Scuffham
Oct 15 (Reuters) - British bank Virgin Money reported a surge in mortgage lending as it benefits from strength in the housing market, with gross mortgage lending up 38 percent to 5.5 billion pounds ($8.5 billion) in the nine months ended September.
Virgin Money, which counts itself among the bigger "challenger" banks taking on established players such as Lloyds , said its mortgage market share had risen to 3.5 percent in the first eight months, the most recent Bank of England figures available.
That compares with the 2.8 percent figure given in its most recent annual report.
The bank, which went public last year having changed its name from Northern Rock, said net mortgage lending almost doubled in the first nine months of the year to 2.6 billion pounds ($4 billion) from a year earlier.
Its shares were up 7 pence at 405.1 pence by 1013 GMT, after rising as high as 419.8p, their highest since Sept. 8.
The British housing market has been buoyant this year and industry body the Royal Institution of Chartered Surveyors last month doubled its forecast for house price gains this year to 6 percent.
Virgin Money, backed by founder Richard Branson and U.S. financier Wilbur Ross, is looking beyond mortgages and said demand for its recently launched credit cards had exceeded expectations. It is also evaluating plans for services to small and medium-sized businesses, or SMEs.
Analysts at Citi said in a note the bank's growth had been stronger than anticipated, especially in credit cards, and this could led to upgrades of around 5 percent in earnings forecasts.
The bank has hired George Ashworth, managing director of ABN AMRO Lease NV's UK branch, to develop an SME banking strategy.
Having received enquiries from small business owners over the past few years, "it's a natural step for the brand," Virgin Money Chief Executive Jayne-Anne Gadhia told Reuters.
Gadhia also said the bank was expecting a moderate increase in interest rates, most likely towards the end of 2016. The Bank of England as a whole is edging closer to an interest rate hike, but voted eight to one last month to keep rates on hold. (reut.rs/1NEZAK2)
Gadhia also reiterated the bank's view on free in-credit banking.
"Free banking has caused a distortion in the marketplace for sure. I think it's a difficult issue for politicians in particular to revoke. Taking away from the UK consumer something that is free I think is a challenge," Gadhia said. ($1 = 0.6463 pounds) (Editing by Gopakumar Warrier and David Holmes)