The British Bankers Association has revealed that the number of mortgages being offered by large high street banks has fallen by 39 per cent.
A total of 38,704 new loans for buying a home were approved by major banks in April 2008, compared to about 65,000 being agreed to in April 2007.
The drop in numbers is thought to be as a result of thousands of mortgage deals being withdrawn by banks and building societies and tighter restrictions on loans being offered to new home buyers.
The decline in home purchase loans was offset by a rise in the number of people re-mortgaging their homes. Official figures from the British Bankers Association (BBA) revealed that almost 75,000 home buyers re-mortgaged in April 2008, a rise of 10.7 per cent compared to the same month in 2007.
The majority of the people who re-mortgaged were those coming to the end of a cheap fixed rate deal or discount mortgage, and have been left in a position where they have been forced to move to an arrangement carrying higher monthly repayments. Higher petrol, food, utility and other essential bills have also helped to compound the problem.
Fears have been raised that the high street banks decision to slash the number of home purchase loans will force the property market and the economy in general into a major downturn.
In an attempt to ease the lending cuts, the Bank of England poured ?50 billion into the banking sector by swapping UK mortgage loans for gold plated Government bonds which can be used as collateral to raise money to fund financial products such as mortgages.
Despite the move being backed by Alistair Darling, the Chancellor of the Exchequer, on the basis that banks would begin to relax the strict lending policy, figures suggest that the financial institutes are simply looking after their profits rather than supporting the Bank of England and the Government?s scheme.
With British banks losing billions of pounds due to the wild lending in the US housing market, sparking the global credit crunch, British consumers are now paying the price through increased mortgage rates and fewer new home loan initiatives.
Global Insight chief economist, Howard Archer, said that house buying in the UK remained under severe pressure from a ?damaging combination? of tighter lending conditions and stretched affordability.
Archer warned that it seemed ?certain? that house prices would continue to fall as potential home buyers are left in limbo due to low wage rises and a lack of confidence in property prices. He said, ?It is looking highly possible that house prices will suffer double digit falls both this year and in 2009, given serious buyer affordability constraints, limited and often more expensive mortgages available due to ongoing tight lending conditions, a deteriorating economic outlook and reduced prospects for further interest rate cuts in the near term at least.?
Statistics director for the British Bankers Association, David Dooks said, ?Pressures on household finances, stalling house prices and tighter lending criteria in response to lower liquidity are all constraining demand for house purchase and equity withdrawal loans, which are both well down on levels last year. In contrast, there is an active re-mortgaging market as people switch lenders to obtain better deals.