Latest figures from Bank of England have shown a decrease in the supply of mortgages during the third quarter of the year, despite banks promising to lend more.

The fall has been blamed on a deterioration in the cost and availability of funds, lenders said. However, they expect mortgage lending to improve in the final part of the year.

The Bank's quarterly credit conditions survey underlined that lenders had reduced the amount of secured lending they did during the three months to mid-September, reversing an increase in mortgage availability seen in the previous quarter.

With taxpayers' support, Royal Bank of Scotland and Lloyds Banking Group have promised to increase the availability of mortgage as well as business lending. While RBS has pledged to lend £25 billion this year, Lloyds is making £28 billion in total available in the next two years.

Both banks are placing hundreds of billions of pounds worth of toxic debts in a taxpayer-backed insurance scheme to restore their finances.

The credit conditions report added that credit availability for businesses had risen in the period, with a further improvement expected in the next three months.

Lenders are extending more loans to large and medium-sized companies due to the cheaper cost of funds, the Bank said.

The spread, or margin, on lending to medium and large sized companies rose between June and September but is expected to "narrow somewhat" in the next three months.

Despite the fall in mortgage availability in the third quarter, there were further signs of improvement in the mortgage market.

The proportion of loan applications that were approved rose for the first time since the second quarter of 2007, while the fees charged on mortgages and the maximum loan to value ratios lenders would advance stabilised.

Banks also reported an unexpected reduction in the number of people defaulting on their mortgages in the third quarter, with this likely to be due to a combination of low interest rates and a raft of Government initiatives to help keep people in their homes.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The Bank of England survey encouragingly indicates that credit conditions may finally be starting to improve and could pick up further in the fourth quarter.

"While latest hard data still indicates muted lending to corporates and households, the Bank of England survey at least boosts hopes that Quantitative Easing and other policy measures undertaken by both the central bank and the Government to boost bank lending are starting to feed through to have a beneficial impact.

"Consequently, the survey raises hopes that credit conditions will increasingly become less of a constraint on economic activity over the coming months. This is critical to sustainable recovery prospects."

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