UK mortgage availability is set to tighten over the next three months.

The Bank of England has warned that the availability of mortgages will continue to tighten over the next three months, as more banks withdraw their offerings.

As the Co-op Bank today become the latest lender to pull the plug on its best deals, the central bank announced in its quarterly survey of credit conditions that banks plan a “slightly larger” reduction in mortgages in the next three months than seen so far this year.

The credit crunch has meant that mortgage providers have been far less likely to lend to each other, leading to a cut in the number of mortgages available.

Since the beginning of March, 2,932 deals have been taken off the market, according to financial information group Moneyfacts.co.uk, leaving just 4,794 deals left; over the past week, the number of mortgage products on offer has fallen by 20%.

One of the country’s top 20 mortgage providers, First Direct, HSBC’s internet bank, pulled out of new lending completely on Tuesday, giving only five hours notice that it was closing to new business; today (3 April), the Co-op announced that its whole range of 2-year fixed rate products will no longer be available from close of play.

Lenders are also expected to cut the amount of ordinary loans, not secured against property, such as credit cards and overdrafts, in the next three months.

As the credit squeeze makes it increasingly difficult for lenders to raise finance, the mortgage market is widely expected to tighten even further as lenders who have not re-priced become overwhelmed by demand.

Those having to re-mortgage this year, expected to be more than one million, will need to shop around more for a deal, but the situation is even worse for first-time buyers, who face having to find a much bigger deposit. To buy an average home in England or Wales, priced by the Land Registry at £185,616, buyers could need a substantial deposit of £27,842.