House purchase loans in September fell 7% year-on-year to 47,603 - the third worst September since records began in 1993 - as improved credit availability for lenders failed to translate into an improvement in mortgage lending.

The latest Mortgage Monitor, produced by e.surv chartered surveyors, found the fall in loans was steepest among high LTV borrowers - typically first-time buyers. Loans for house purchase fell across all LTV bands and house price brackets, suggesting that the government’s Funding for Lending Scheme (FLS) is not making a positive impact on the mortgage market.

The average LTV on a house purchase loan in September fell to 59%, the lowest since last January, reflecting the sharp fall in loans to borrowers with small deposits. Just 1 in 10 of all house purchase loans went to borrowers with an LTV of 85% or over, continuing a three month trend. The number of loans to borrowers with a deposit of less than 15% has now fallen below 5,000 for the last three months.

Richard Sexton, business development director of e.surv, said: “September isn’t just a one off. The mortgage market has been struggling since early June, and is considerably weaker than it was this time last year. The period between August 2011 and May this year marked a real upturn in lending. But that fillip planted false hope. Since then, the effects of the double dip recession have sapped the confidence lenders have in the economy. That, combined with a squeeze on the funding lenders get from the money markets, has dragged down lending. Criteria on high LTV mortgages have become more restrictive, and this has choked off first-time buyer lending.”

Despite 18% more mortgage products with a LTV of above 85% being on offer to borrowers since April 2011, and with lenders reporting an improvement in mortgage credit over Q3, fewer applicants have been able to access high LTV loans because of toughening lending criteria. The apparent contradiction between more LTV mortgage products on the market and a fall in lending suggests lenders are not yet confident enough in the economy to increase lending to borrowers with low deposits and low incomes significantly.

Sexton added: “Analysts have been quick to criticise the Funding for Lending Scheme after an inauspicious start in August, but it will prove to be a slow-burn. The Bank of England’s latest credit conditions survey suggests an improvement in house purchase lending may be on the horizon.

“Lenders have told the Bank that the availability of secured credit will increase ‘significantly’ over the fourth quarter, and specifically referenced the Funding for Lending Scheme as a key driving force in the improvement. Lenders say it has helped increased their mortgage funds by 36%, the biggest increase since records began. If it is a slow-burn, FLS will begin to translate into higher mortgage lending in the fourth quarter, which will help more first time buyers get a foot on the ladder.”