Homeowners repaid £418 million more than was advanced during the month as the credit crunch continued to restrict new lending by banks and building societies.
It was the first time that net lending has been negative since the Bank of England began collecting data in its current format in 1993.
The steep fall in net lending was driven by the ongoing contraction in the amount building societies are advancing.
Separate figures from the Building Societies Association, also released today, showed that mortgage customers repaid £577 million more during July than was lent, the seventh consecutive month during which the figure has been negative.
The ongoing problems in the credit markets have also impacted the major banks, with the British Bankers’ Association saying last week that net lending in July fell to its lowest level since October 2000.
At the same time, many homeowners are taking advantage of record low interest rates to increase the amount they repay each month, contributing to July’s negative figure.
Consumers also repaid more unsecured debt than they borrowed during the month, with outstanding consumer credit falling by £217 million.
Within this total, borrowing through credit cards rose by £92 million, but net repayments on loans and overdrafts totalled £309 million, as people continued to reduce their debt in the face of rising unemployment.
Overall, total lending to individuals contracted by £635 million, which was also the first time on record that the figure has been negative.
But the data did contain some better news, with the number of mortgages approved for house purchase breaking through the 50,000 mark for the first time since April 2008.
A total of 50,123 loans were approved for people buying a property, the sixth consecutive monthly increase.
There was also a further slight improvement in the number of people remortgaging, with the figure rising to 35,206.
Benjamin Williamson, an economist at the centre for economics and business research, said: “This news will not make happy reading for policymakers who have taken significant steps over the last year to encourage greater volumes of lending throughout the economy.
“While the data are surprising, it is important to remember that this monthly net change is relatively small given the stock of lending in the economy.
“The Monetary Policy Committee will consider their options in this context when they meet next week. Nevertheless today’s data are unlikely to discourage calls for a further expansion of the quantitative easing programme.”
Vicky Redwood, UK economist at Capital Economics, said: “The further 2,000 rise in mortgage approvals for new house purchase to 50,100 in July is also modestly encouraging - but at that pace of improvement, it will take several months yet for housing activity to reach the levels consistent with sustained rises in house prices.”
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