The mortgage famine is set to get worse, a closely watched Bank of England study revealed today.

Banks and building societies expect to pull home loan offers more aggressively in the next three months than in the past three months, the Bank's closely watched Credit Conditions survey found.

They also plan to increase the margin over base rate they charge mortgage borrowers, offsetting the benefit of any potential cut in base rate.

It also emerged today that UK banks demanded more than twice the cash offered by the Bank of England in its weekly auction that is aimed at pumping liquidity into the British financial system.

Banks today bid for £27.7 billion, above the £13.4 billion the Bank of England offered at a charge of 5.25 per cent, in line with the current interest rate. Last week, the Bank's auction was three times over subscribed, with lenders bidding £37.8 billion for the £13.6 billion available.

The Bank of England's gloomy outlook in its Credit Conditions survey follows a recent rush by banks to pull mortgage offers as they seek to conserve cash in the face of the credit crunch which has curbed their ability to raise wholesale funding. This week First Direct abandoned offering home loans to any but existing customers.

Lenders also plan to reduce supplies of unsecured credit — personal loans and credit card debt — "somewhat further" over the next three months, the Bank said.

That could seriously hit the most stressed households, who appear to be resorting to expensive unsecured borrowing as other sources of credit dry up. Unsecured personal borrowing ballooned from £900 million to £2.4 billion in February, according to surprise figures yesterday.

In another worrying trend, banks are also reporting being wrong-footed by the speed at which companies are failing to meeting interest bills on loans. Default rates by medium-sized and large companies "picked up more sharply than expected over the past three months," the Bank said, adding that default rates were expected to rise further in the next quarter.

The Bank this morning also revealed that it would offer £13.4 billion today to banks as part of its weekly open market money operations.

Philip Shaw, an economist with Investec, said: "The situation has deteriorated further and that’s consistent with the news over the past few days that mortgage lenders have been raising their rates and withdrawing products. Overall we feel that there is a very strong case for rates coming down next week and we continue to expect a 25 basis point cut to 5 per cent.”

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