Cost of mortgages 'set to rise'

At the same time the cost of mortgages also looks set to rise, as lenders increase their margins, according to the Bank of England's Credit Conditions Survey.

Lenders are also bracing themselves for a further rise in the number of homes that are repossessed, after seeing an increase in default rates during the first three months of the year.

Nearly 31% more lenders said they had reduced mortgage lending during the three months to mid-March than those who had increased it, with nearly 43% more expecting to cut back on lending during the coming quarter.

The main reason given for the move was the changing economic outlook and increased concerns about the housing market, with lenders also reporting a reduced appetite for risk.

Lenders said they had reduced mortgage availability partly through tightening their credit scoring and reducing the maximum loan to value ratios they were prepared to advance, and they expect this trend to continue.

The reduction in lending came despite mortgage demand among people buying a house remaining broadly unchanged compared with the previous three months, with demand from people with buy-to-let properties and those with adverse credit histories stronger than expected.

High demand outside of the mainstream market is likely to be caused by lenders who are not represented in the Bank's survey cutting back on the level of mortgages they offer.

At the same time, demand from people remortgaging rose strongly during the first quarter of the year, and this is expected to increase further during the coming three months as more borrowers come to the end of fixed rate and discount deals.

Predictions among banks and building societies that they will reduce the amount of mortgages available at a time when demand is likely to be increasing, suggests the current scramble for available deals, which has seen many lenders overwhelmed by demand, will intensify.