Mortgage lending slumped by 17 per cent in the 12 months to March after the rising cost of home loans and tightening credit conditions dampened the start of the traditional spring house buying season.

Early estimates from The Council of Mortgage Lenders (CML) released today show total home loans granted in March, which includes new loans and remortaging, fell from £31.7 billion in the same month last year to £26.3 billion, the lowest figure for that month for three years.

Overall mortgage lending for the first three months of the year fell by 8 per cent, down from £83.9 billion to £77.2 billion. The CML will publish a full breakdown of new home loans and re-mortgages granted during March on May 13.

Howard Archer, the chief UK and European economist at Global Insight, said: "The low level of mortgage activity is not only a consequence of slowing demand for houses due to the elevated affordability pressures facing potential house buyers, but also increasingly due to very tight credit conditions leading to markedly fewer and more expensive mortgages being available.

"Furthermore, potential house buyers are now having to provide higher deposit levels, which is a particularly major problem for first-time buyers."

Citigroup, the US investment bank, is estimating that house prices could fall by 6 per cent this year, double the 3 per cent decline it forecast in December. The bank's estimate is more conservative that its rival, Morgan Stanley, which yesterday predicted that prices will decline by 15 per cent over the next two years, pushing one in 10 of British homeowners into negative equity. This means a person's home is worth less than their mortgage.

Citigroup is also expecting the number of new homes being built in the UK will also contract by 25 per cent this year as demand wanes.

Yesterday, Taylor Wimpey, Britain's largest housebuilder, warned that the UK housing is weakening further and that its order book for new homes had fallen by 26 per cent, compared to the 20 per cent drop it revealed in March at its full-year results announcement, while the rate of cancellations has risen.

Last week, Steven Crawshaw, the chairman of the CML and chief executive at Bradford & Bingley, Britain's largest buy-to-let lender, warned that tens of thousands of current borrowers and new buyers will be refused mortgages unless the Bank of England provides more help to lenders.

The Bank of England is set to announce plans to help ease the mortgage drought by swapping home loan backed assets in exchange for government gilts which can then be used as collateral for banks to borrow money from each other.

Banks have become more reticent to lend money to each other which means the rate they charge to loan money to rivals, otherwise known as the London inter bank offer rate (Libor), is 5.91 per cent - nearly one percentage point above the UK interest rate which was cut last week from 5.25 per cent to 5 per cent.

As a consequence, banks are passing on higher charges to their customers by increasing the rates on some of their mortgage products.

There is speculation that an announcement could be made early next week when Alistair Darling is due to meet the CML.

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