Only 11,307 loans for properties worth up to £125,000 were approved in April down 5% from March.
Banks blamed increasing mortgage funding costs and renewed fears over their exposure to the eurozone crisis for the reduction in lending.
March was the third successive month in which first-time buyer loans had fallen, confirming the Bank of England’s view that banks and mutuals were pulling back from lending to borrowers with small deposits over the summer.
The number of loans franted to borrowers with a deposit of 15% or under fell to 5,309, well below the three-month average of 6,229.
In the overall market around 49,165 loans for house purchases were approved, a fall of 1.4% from March.
The average deposit on a house purchase loan rose above 40% for the first time since February 2011.
April was the fourth consecutive month in which the average LTV had fallen suggesting it had become increasingly more difficult for borrowers to access high LTV loans.
Richard Sexton, business development director of e.surv, said: “The market has shown real fighting spirit and stood up well to the economic malaise engulfing Europe and the UK economy. Up until the early spring mortgage lenders did a sterling job of coping with steadily increasing funding costs imposed by investor anxiety in the wholesale markets.
“But we’ve reached a tipping point now. Banks and building societies can’t afford to sustain their current levels of high loan-to-value lending.
In addition to their increased funding costs, they are also concerned about their exposure to the debt-riddled European countries and the increasingly precarious state of borrower finances in the UK.”