The mortgage market has been turned on its head. Banks and building societies used to compete on price, vying to offer the lowest rates and most reasonable arrangement fees. The aim, after all, was to attract borrowers through their doors.

But the credit crunch has prompted a complete volte-face. Instead of competing to offer the lowest rates, lenders are now competing to offer the least attractive deals, terrified that if they are left exposed as the “best-buy” on the market they will be inundated with mortgage applications.

Their fears are well founded. After all, First Direct, the online arm of HSBC, which offered some of the most reasonably priced mortgages on the market this year, was forced to close its doors for seven weeks to allow its staff to catch up on the backlog of applications it had received.

Trying to limit the number of customers you attract flies in the face of every business manual. If you punted the idea to Sir Alan Sugar, you would be leaving the boardroom at a sprint. So why are lenders doing this complicated dance of dodging new customers?

Most lenders raise funding by packaging together their loans and then selling them on to investors. But the appetite for these investments disappeared after the US sub-prime crisis and simply has not returned, as Northern Rock found to its cost.

There was talk among lenders at the beginning of the year that authorities needed to take action to try and put some cash on the table to boost funding in the market, allowing the mortgage party to continue. The Bank of England eventually obliged, putting billions of pounds at the disposal of lenders in the hope of staving off a complete famine of home loans.

This seems to have had little effect, because lenders are still struggling to raise funding and rates are still high.

As anybody trying to sell their home will tell you, the housing market is also feeling the impact. High mortgage rates and onerous demands for hefty deposits are deterring all but the most affluent prospective buyers from buying a new home. This lack of activity in the market is exacerbating the fall in house prices as sellers cut their prices to try to secure a sale. House prices have fallen by 6.6 per cent this year alone, twice as fast as the first five months of 1992, one of the worst years in the British housing market.

As a result, homeowners are now faced with the double-whammy of paying more for their mortgage while their home falls in value.

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