Lenders expect to improve their range of mortgages this year but this will be offset by tougher lending criteria, a Bank of England survey has found.
Despite the tough economic backdrop, the Bank's quarterly credit conditions survey said lenders were planning to launch more innovative deals, particularly for those who have smaller deposits.
This could help first-time buyers, who have found themselves trapped in the rental sector and fell to their lowest proportion of the housing market for nearly three years in the autumn.
Lenders also predicted that the credit scoring criteria for granting loan applications would be tightened in the first three months of this year, meaning loan approvals would drop in the next three months.
The report said some lenders had revised down expectations for households' disposable incomes and therefore the affordability of taking out new deals. Households have seen their budgets squeezed due to high living costs and the failure of wages to keep up with rising bills, amid a backdrop of deteriorating employment conditions.
While demand for lending for house purchase fell in the last three months of 2011, interest in the buy-to-let market picked up, although lenders expect overall demand to drop off slightly in the coming quarter.
Mortgage default rates fell slightly in the last three months of last year, despite previous predictions of no change. But some lenders noted the "depressed" housing market had made it harder for them to claw back any losses.
Demand for unsecured lending went down in the fourth quarter of 2011, despite predictions in the previous quarter that it would go up. Consumer demand for credit card lending went down slightly while demand for other types of unsecured credit "contracted sharply", the report said.
Overall, demand for unsecured lending was expected to fall further in the first quarter of this year as consumers continued to shy away from borrowing. The report said: "Lenders commented that economic problems in the euro area had impacted negatively on consumer confidence and the demand for unsecured credit."
Lenders also noted a "substantial" fall in the default rate on unsecured loans for the eighth quarter in a row, with losses from people defaulting on their credit card payments expected to fall further this year.
© 2012 Press Association