UK mortgage lending fell by 32 per cent in the year to June and is will worsen further if the Bank of England raises interest rates in a bid to combat inflation, mortgage lenders warned today.

Figures from Council of Mortgage Lenders (CML) show that during June - traditionally one of the busiest periods in the housing market - gross mortgage lending fell 3 per cent to an estimated £23.8 billion as buyers struggled to secure new home loan deals.

The CML said today the pace of decline in the mortgage market was accelerating, with lending in the first three months of this year down 11 per cent and by 21 per cent in the second quarter.

But there was a glimmer of hope for homeowners as Halifax, the UK's biggest mortgage lender, announced it was cutting some mortgage rates by up to 0.15 per cent. This comes after Nationwide Building Society cut some of its rates earlier this week, although it increased rates for borrowers who have less than a 10 per cent deposit.

However, Michael Coogan, director general at the CML, said that lenders' funding shortages was hampering the mortgage market and indicated that the Government needed to step up support.

He said: “Government efforts to help housing associations purchase new-build properties and borrowers to save for a deposit are welcome, but are likely to have only a marginal impact on the housing market. "

Earlier this week, the CML published its proposals to help kick-start the mortgage market.

It suggested that the Bank of England offer further loans in exchange for new mortgage-backed securities which have been sold in the credit markets.

In a stark warning, Mr Coogan said that the situation in the mortgage market was unlikely to improve soon. “While by historic comparisons we still have had a good level of gross lending, new net lending has been constrained in 2008 and this picture will continue for the rest of this year," he said.

Earlier this month, the Bank of England's Monetary Policy Committee voted to keep the UK interest rate at 5 per cent.

However, there are fears the Bank could decide to raise borrowing costs following another increase in inflation which is now at 3.8 per cent - nearly double the Government's 2 per cent target.

Howard Archer, chief UK and European economist at Global Insight, said: "It is very possible that the Bank of England's next move could be to raise interest rates, which would clearly be very bad news for the housing market.

"Very negative housing market sentiment also heightens the risk that house prices will fall sharply over the next couple of years."

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