Mortgage interest payments are consuming less of borrowers’ incomes as those able to get a mortgage are stretching themselves less financially and beginning to benefit from reductions in bank rate, according to the Council of Mortgage Lenders (CML).

Interest payments typically consumed 18.2% of a first-time buyer’s income in November, the lowest proportion since February 2007. Home movers in November typically spent 14.4% of their income on interest payments, the lowest proportion since April 2006.Lenders have cautiously tightened their lending criteria as a result of the shortage of funding and falling house prices. The improvement in affordability is largely due to the fact that borrowers who are able to obtain credit are lower risk and less stretched.There were 12,400 loans to first-time buyers worth £1.4bn in November, compared with 15,400 loans worth £1.8bn in October. The average first-time buyer put down a deposit of 18%, the largest it has been in 35 years of available data.There were 20,600 loans to home movers worth £3bn, compared with 24,600 loans worth £3.7bn in October. The average home mover deposit was 32%, the largest since November 2004.There were 33,000 house purchase loans worth £4.5bn in November, the lowest level of activity since the CML began collating monthly data in 2002. Gross lending declined 24% from October to £14.2bn, and down 53% from November 2007.Remortgaging declined by 25% from October to 52,000 loans worth £7bn. The CML expects remortgaging to continue to fall in coming months as reversion rates are attractive relative to many new products on the market and borrowers with low levels of equity will have fewer remortgaging options.CML director general Michael Coogan said: “Limited mortgage funding and reduced consumer demand will weaken lending activity further in coming months. The flow of funds to the mortgage market will not improve this year without further intervention by the Government.“Lenders are currently juggling attempts to help existing borrowers and savers, and maintain new lending and deposits. And the Government too is facing the difficult decision of how to share out limited resources to help small businesses as well as the mortgage market’s existing borrowers in difficulty and prospective borrowers shut out of the market.“Affordability is improving for those who are able to access a mortgage, but saving for a deposit will still be a constraint for many would be first-time buyers. Borrowers who are benefiting from lower mortgage rates should over-pay if they can afford it to reduce their mortgage balance and protect themselves against falling house prices. And now is also a good opportunity for borrowers on interest only mortgages to switch to repayment mortgages to use this period of low interest rates to start to pay down their loans.”

UK mortgage approvals fell to a fresh record low in November and banks reduced loans to households and businesses in the final three months of 2008 as a deteriorating economic outlook and falling house prices deterred lending, according to data from the Bank of England released yesterday.

Mortgage approvals fell to 27,000 from 31,000 in October, the Bank said. That was below expectations of 32,000 approvals and the lowest figure since the report began in 1999.

The Bank’s quarterly credit conditions survey, also published yesterday, showed that secured lending to households - largely in the form of mortgages - tightened again between October and mid-December and by more than had been expected in the previous survey.

The data came as Halifax, Britain’s biggest mortgage lender, reported that house prices were 16.2 per cent lower in the final three months of last year compared with the same period in 2007. That is the fastest pace of decline since Halifax began keeping records in 1983 and faster than during the recession and housing bust of the early 1990s.

Halifax reported that house prices tumbled by a further 2.2 per cent in December, after falls of 2.6 per cent in November and 2.4 per cent in October. Economists had forecast a 1.7 per cent drop in December and for prices to be 16.6 per cent lower over the past quarter compared with the year before.

The Bank said secured lending was expected to fall again in the next three months, and that unsecured lending - such as credit card debt - as well as lending to businesses had also been cut in the final quarter of last year.

Demand for mortgages and remortgage loans remained broadly stable over the period, while demand from businesses for loans for capital investment, mergers and acquisitions activity, and from the real estate sector fell.

“The further significant tightening of credit conditions for both households and corporates in the fourth quarter of 2008, and the expected continuation of these trends in the first quarter of 2009, bodes ill for business activity, investment, employment, consumer spending and housing market activity,” said Howard Archer, economist at Global Insight.

“Indeed, Bank of England governor Mervyn King has stressed that ongoing very tight credit conditions pose perhaps the most serious risk to the deeply struggling UK economy.”

The continuing weak economic data increase the likelihood of further rate cuts by the Bank next week.

Reported by:  Daniel Pimlott in Londo - Financial Times

UK house prices plummeted by 16.2pc in 2008 in the biggest drop for a calendar year on record, according to the country’s largest mortgage lender.

The average value of a home dropped by 2.2 per cent in December, according to the latest survey from Halifax. It’s the biggest year-on-year fall since the Halifax began recording its data in 1983. The lender said the typical price of a home now stands at £159,799, back to August 2004 levels and that it fails to see much in the way of respite for the once-booming market in 2009 as the economy tumbles into recession.

Martin Ellis, chief economist at Halifax, said: “Continuing pressures on incomes and the negative impact of the dislocation of the financial markets on the availability of mortgage finance are expected to exert further downward pressure on the market over the coming months.  “But a number of factors will help to support demand and should help to limit the downturn. Improving housing affordability and an easing in the pressure on the majority of households’ finances should support market activity and prices. The house price to earnings ratio - a key affordability measure - is at its lowest for five and a half years.”

The annual drop was sharper than during the recession of the early 1990s, according to Howard Archer, chief UK and European economist at Global Insight. He expects house prices to fall by a further 15pc in 2009, on the Halifax measure.  “It is still very difficult for many people to get a mortgage or find the required larger deposit,” Mr Archer said. “Even if government measures to get banks to step up their lending increasingly take effect, it will clearly take time for confidence to improve and mortgage lending to pick up significantly.

Andrew Montlake, of mortgage brokers Cobalt Capital, said: “It may be 2009 but the ghosts of 2008 will continue to haunt us, and for some time yet. The November mortgage lending figures from the Bank are just another grim reminder of the death, last year, of easy money and consumer confidence, and there will be many more in the months ahead.”

Halifax is part of HBOS, one of the UK banks forced to sell a large stake to the government in exchange for capital to shore up its balance sheet.

Separate figures showed mortgage approvals dropped to a record low in November, data from the Bank of England showed today.

By Myra Butterworth and Amy Wilson – Telegraph.co.uk