The British Bankers Association (BBA) said that in May, the number of new mortgage approvals to home buyers fell to just 28,000. That was a 20% fall in just one month and 56% down from May last year.

The BBA said the number of new approvals was the lowest since its records started in 1997 and warned that the market would stay subdued as it is going through a rapid and unprecedented slump in activity and sales.

The figures from the BBA suggest the most dramatic contraction in lending so far. However, its data does not include building societies. Figures from all lenders will be published by the Bank of England on 30 June.

It can seem at the moment like every week a new set of figures is released and the story changes. One minute we are heading to complete financial disaster, house prices will not just fall but crash and then the next we are told it is all a fuss about nothing that will blow over in a few months.

The simple fact is that while these extremes are unlikely either could happen. We will almost certainly steer a middle course with constriction in the housing market mirroring other parts of the economy but a general recession will be avoided.

That will be of little comfort to the prey of negative equity and the first time buyers frozen out of the market but it is in fact good news.

New figures recently released have revealed that the cost of two-year fixed-rate mortgages has reached a 10-year high. The average rate of the popular home loan is now above seven per cent whereas it was less than five per cent before the credit crisis struck.

The increases have come despite the Bank of England cutting or freezing the base rate during 2008. A £50 billion government package to boost the mortgage market and bring down home loan rates also appears to be having little effect.

Mortgage lenders have been raising their rates because of concerns that the BOE may start increasing the base rate later in the year to keep control of inflation, which is at a 16-year high.

According to Moneyfacts.co.uk, a financial website, the average rate for a two-year fixed-rate deal has increased to 7.02 per cent from 6.75 per cent at the beginning of last week and from 6.61 per cent at the start of the year.

The increase since the beginning of the year will cost someone taking out a £100,000 mortgage an extra £410 a year increasing to more than £2,000 annually for a £500,000 loan. Most people taking out fixed-rate mortgages will also have to pay large arrangement fees.

The latest increases mean that banks now typically charge the same for their two-year fixed-rate deals as for their standard loans. Standard variable rate loans were previously far more expensive than short-term deals but there is now little incentive for borrowers to switch.

More than one million borrowers are due to come off cheap deals taken out two years or more ago and will now face a significant “payment shock”.