The collapse in mortgage lending continued last month as banks further tightened the screws on home loans and would-be buyers shied away from the plunging housing market, new figures confirmed today.

Total of mortgage lending by banks and building societies last month fell to just £17.7 billion, the lowest monthly figure for more than three and a half years, the Council of Mortgage Lenders (CML) reported.

The estimated figure for gross mortgage lending in September was down another 10 per cent from August alone, and was 42 per cent below a year before.

Although mortgage lending typically does suffer a seasonal drop between August and September as many people are on holiday, the £17.7 billion worth of loans was also the lowest figure for any September since 2001.

Over the third quarter as a whole, gross lending was estimated by the CML at £62 billion, down 16 per cent from the second quarter, and by 37 per cent from the same period last year.

The plunge in home loan activity comes as the mortgage drought triggered by the global credit crisis continues to lead banks to hoard funds and tighten conditions for prospective borrowers.

Michael Coogan, the CML’s Director-General, insisted that “the mortgage market is open for business”.

He conceded, however, that a combination of wariness among potential home buyers as house prices continue to tumble, leading to weak demand for loans, as well as banks’ funding constraints was set to keep mortgage lending figures weak into the spring of next year.

The CML estimated that annual gross lending in 2008 will be around £255 billion, compared with £363 billion in 2007, and net lending, after stripping out loans paid off, will be less than half the £108 billion figure for last yearm at about £40 billion.

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