Home loans slump 20 per cent as housing market stutters

There was fresh evidence of a cooling housing market today after figures showed the number of home loans slumping more than 20% in December.

The Council of Mortgage Lenders (CML) said there were 62,000 loans over the month - 22% below November's 78,000 - due to factors such as lenders tightening standards and the introduction of home information packs.

Over the course of last year the number of loans fell by almost 10% to one million, with the value of the lending declining by 2% to £155 billion, the CML said.

Director general Michael Coogan said: "The decline in lending appears to be driven more by funding constraints than lower consumer demand."

While affordability worsened in 2007, rate cuts from the Bank of England in December and last week to 5.25% should ease the difficulties for those coming off fixed-rate mortgages, he added.

By December the average first-time buyers were spending 20.7% - or £7,300 - of their annual £35,300 household income on mortgage interest, the CML figures showed.

This is the highest since the third quarter of 1991, when interest rates stood at more than 10%.

"For first-time buyers, the combination of subdued house price inflation and lower mortgage rates means affordability should ease slowly as the year progresses," Mr Coogan added.

Just 40% of first-time buyer mortgages were for homes under the £125,000 stamp duty threshold last year - compared with almost 50% during 2006.

"This is an issue which the Government can address by raising the threshold in the upcoming Budget," the CML added.

A record number of borrowers - 73% - took out fixed-rate mortgages last year to guarantee their monthly payments.

This peaked at 77% in July, as the Bank hiked interest rates to 5.75% and economists predicted borrowing costs could soar above 6%.

But by the end of the year, just 64% were opting for fixed-rate deals after fears for the economy in the aftermath of the credit crunch set borrowing costs on a downward path.

Homeowners are set for more relief following the two recent rate cuts after lower than expected inflation figures today.

While the cost of living is still above the the Bank of England's 2% target, experts said the data may give policymakers leeway to ease interest rates again in the next few months.