As a result, gross lending in 2020 fell to £241.2bn – down from £267.7bn in the previous year, according to Bank of England figures.
There were 818,500 purchase approvals in 2020 up from 789,100 in 2019, marking the highest number since 2007.
It comes after numbers plunged to just 9,400 in May when the property market ground to a halt amid Covid-19 restrictions.
The market largely made up for difficulties in the spring during the second half of the year, with borrowing coming in at £24.2bn in December, up from £23.2bn in November, the data showed.
Approvals for remortgage fell to 33,800 in December making total numbers 451,400 in 2020, below the 587,600 seen in 2019.
Interest rates in December continued to climb on new borrowing, hitting 1.9 per cent – the highest level since October 2019.
Despite the bumper end to 2020, critics remain cautious about the outlook for the market.
Jeremy Leaf, north London estate agent and a former Royal Institution of Chartered Surveyors (RICS) residential chairman, said: “Not surprisingly, mortgage approval figures were so strong at the end of 2020 on the crest of the home-buying wave as many sought to buy before the stamp duty deadline.
“However, while these figures are always a good indicator of direction of travel for the market, we won’t be getting carried away, not least because the year’s low for these approvals appeared a couple of months after the first lockdown.
“Similarly, the change in market conditions we are seeing on the ground now will not be seen in the numbers for another month or two at least.”
David Ross, managing director of Hometrack, added: “The market did experience its typical seasonal slowdown but we are still seeing strong growth in mortgage applications as buyers rush to beat the stamp duty deadline.
“While demand is strong average interest rates are ticking up, reflecting sustained demand for higher loan to value mortgages.
“These continued improvements, while welcome, are incremental and cautious. It remains to be seen whether these will be enough to weather the impact of Covid on the economy in the months to come.”