But the bank said it had maintained its market share for new mortgage lending despite UK lending only shrinking by 10 per cent due to the coronavirus pandemic.
It has also predicted a drop of two per cent for house prices over the course of 2021, but believes mortgage market lending will grow at around two per cent.
This would claw back some of the overall drop in mortgage lending from £267.7bn in 2019 to £241.2bn in 2020 which the Bank of England reported this week.
As part of its end of year management statement, Santander revealed lending to first-time buyers dipped from £7bn to £5.4bn, however buy-to-let completions edged up from £2.5bn to £2.6bn.
It also revealed 89 per cent of the 251,000 mortgage holders it granted payment holidays to were back up to date, eight per cent had remained in a payment holiday, with two per cent now in arrears following the deferral period.
In total £2.5bn worth of mortgages was still in a payment holiday at the end of the year out of the original £37.1bn worth that were granted.
The lender said it had seen margin pressure on its back book, including £1.8bn worth of mortgages coming off its standard variable rate.
But it added that 81 per cent of its refinanced mortgages were retained online, up four per cent from 2019.
And as a result its overall mortgage book grew by £4.4bn to £168bn, with the proportion of lending on fixed rates rising to 80 per cent of the book.
House price dip forecast
Looking towards 2021, Santander anticipated mortgage market lending growth of around two per cent, with house prices falling by around two per cent, and it predicts its hit from loan defaults to be lower than previously expected.
“With further lockdown restrictions imposed in January 2021, the UK economic environment remains challenging,” it said.
“Our base case assumes some form of restrictions are still in place in Q2 21 and growth recovers over the latter part of the year as the vaccine rollout continues and businesses become more familiar with the new EU trading environment.
“With the pace of future recovery closely linked to the vaccine rollout, we remain cautious in our outlook.”
It also expects net mortgage lending to be in line with market growth and the net interest margin to be in line with the rate at the end of the year, based on stable mortgage margins and no change to the Bank of England base rate.