Building society lending hit year high

However, the figure is still 42% lower than the £3.6bn recorded in July 2008, with mortgage approvals were also down on the year.

Home loan agreements reached £1,49bn in July 2009, compared to £2,64bn in July 2008.

Adrian Coles, director-general of the BSA, said he expected funding constraints to keep the mortgage market subdued over the remainder of the year.

He explained: “We warned back in March, when Bank rate was cut to its present level, that the flow of funds into the mortgage market would be restricted as savings inflows decline as a result of very low interest rates.”

In the savings market, balances held in savings accounts with building societies reduced by £900m. That compares to an increase in balances of £1.9bn in July 2008.

Coles continued: “Low interest rates, rising unemployment and weak earnings growth create an environment in which it is very difficult for deposit takers to attract funds.

"With the retail market currently the most important source of funds for all lenders, and with wholesale funding continuing to be disrupted, it is perhaps not surprising lending activity is constrained.”