Demand for new mortgages tanked by 20% during the June quarter when compared with the same time last year, figures from credit reporting agency Veda Advantage show.

The figures depict the largest quarterly drop in mortgage credit demand in the six years Veda Advantage's Credit Demand Index has been measured, with the 20% drop in the June quarter following a 15% fall in the January to March quarter of 2010, year-on-year.

This was also the second consecutive quarter decline when measured year-on-year, with applications dropping at almost the same rate as was seen in the April to June quarter of 2008, which fell by 18%.

The biggest falls in mortgage applications were in Queensland, down 28%, NSW, down 23% and Tasmania, down 22%. Meanwhile, Western Australia fell by 21%, South Australia by 19%, the Northern Territory by 19%, and the ACT by 12%, when measured year-on-year.

Chris Gration, Veda Advantage head of external relations, said rising interest rates and a "saving rather than spending" mentality could be holding Australians back from taking on debt.

“Australian consumers appear to be continuing the saving habits adopted during the 2009 downturn. Evidence suggests many people continue to focus on paying down debts rather than extending their credit,” he said.

The group expects the new responsible lending law which begins for most credit providers in January 2011, will provide more confidence for consumers -especially those using fringe lenders - and a corresponding boost to credit demand.

“Credit providers will be encouraged to use new tools to check income and capacity to make sure consumers can repay credit without substantial hardship," Gration said. "Responsible lending laws will support more confident borrowing by Australian consumers and better risk measurement tools for lenders.”

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