Banks said they had reigned in mortgage lending during the three months to mid-June, with many anticipating further cutbacks during the third quarter as the economic outlook continues to worsen.

They also plan to further tighten their lending criteria, with continued increases in the size of the deposits they demand from borrowers, although the cost of mortgages looks set to remain broadly unchanged.

The Bank of England's Credit Conditions Survey found that a net balance of 47% of lenders had reduced mortgage availability during the three months to mid-June, with a balance of 22% anticipating further cut backs going forward.

The main issue driving their reluctance to lend was the worsening economic outlook and house price falls, although the cost and availability of funds due to the credit crunch and a reduced appetite for risk were also factors.

Default rates on mortgages rose by slightly more than lenders expected during the period as households struggled to meet repayments due to the economic downturn.

Banks also said losses on these defaults were also higher than had been anticipated, although they added that the rise was from a low base.

The situation is set to continue to worsen going forward, with a balance of 52% of lenders expecting losses on secured lending continuing to rise.

Lenders also reported reduced demand for mortgages for house purchase from consumers, with demand expected to tail off further in the coming months.

Recent figures from the Bank of England showed that mortgage approvals for house purchase in May had dived by 64% compared with the previous year.