MORTGAGE availability shrank back "significantly" in the three months to early September following two years of continuous expansion, the Bank of England has found.

Lenders told the Bank they have also become less willing to lend to people with deposits of less than 10% for the first time since the Bank started asking them this question in 2013.

The fall in mortgage availability was reported by banks and building societies to be due to a changing appetite for risk as they got to grips with new stricter rules about the way they can hand out home loans.

Expectations about house prices, which have surged to record highs in recent months according to a string of studies, have also been a factor in their more cautious mood.

The Bank's Credit Conditions Survey found that many lenders experienced "operational issues" as they put the new Mortgage Market Review (MMR) rules into action. This had the effect of pushing down on mortgage availability over the summer.

The rules under the MMR, which came into force in April, mean that lenders have to spend more time asking both home buyers and people looking to remortgage detailed questions about their spending habits, in order to make sure that they can truly afford the mortgage they are applying for.

The Credit Conditions Survey said that mortgage availability has fallen for borrowers with larger deposits of more than 25% as well as for those with smaller deposits over the last three months. Demand from potential home buyers for mortgages has also seen a significant decrease.

In a further sign that it is getting tougher to get a mortgage, the proportion of home loans being approved has fallen as lenders have tightened their credit scoring criteria.

However, looking ahead, lenders expect availability of mortgages to increase in the coming months, which will be driven by them looking to meet their market share objectives. Demand for mortgages is also expected to pick up in the months ahead.

A string of lenders have slashed their mortgage rates in recent weeks, which experts have put down to lenders looking to meet end-of-year targets by sharpening up their ranges.

The Bank's report indicates that this trend is set to continue, as lenders said they expect their profit margins on home loans to narrow further in the coming months.

Andrew Montlake, director at mortgage broker Coreco, said: "What is encouraging is that we are now seeing more availability of mortgages as lenders look to hit the lending targets they have fallen behind on by the end of the year.

"This has led to a mortgage rate war breaking out as competitive pressures help to cut mortgage rates in every part of the mortgage market."

He said that, when these new low mortgage rates are put together with recent evidence, the pace of house price growth is now easing back from the strong increases seen earlier this year, and the last three months of 2014 could turn out to be "a very competitive period for buyers".

The Bank's survey also found that credit availability for smaller businesses "fell slightly" in the three months to early September, while it remained unchanged for medium-sized firms and large corporates.

Demand for lending fell for small businesses but increased significantly for medium-sized businesses and also rose for large firms.

The proportion of loan applications being approved fell for small businesses, but saw a slight increase for medium-sized companies and remained unchanged for large corporates.

The report said demand for corporate lending is expected to increase in the coming months as the economy continues its recovery, with the growth coming particularly from medium-sized firms.

Howard Archer, chief UK and European economist for IHS Global Insight, suggested that many smaller firms are still wary of relying on bank borrowing and are continuing to pay down their debt.

He continued: "It is vitally important for sustained, balanced UK growth that all companies who are in decent shape and who do want to borrow - whether it be lift investment, explore new markets or generally support their operations - can do so, and at a non-punishing interest rate.

"This applies to all companies, whatever their size."

Meanwhile, consumer demand for borrowing on credit cards was reported to have increased in the last three months, following declines over the previous nine months, the Bank's report said.

A further significant increase in demand for credit card borrowing is expected in the next three months, with lenders putting the increased appetite down to improvements in economic growth as well as successful marketing campaigns, with strong competition around balance transfer offers.

Demand for personal loans is also predicted to pick up significantly over the next three months.

The Bank's latest Credit Conditions Survey of bank and building society lenders, which is carried out to help maintain financial stability, was carried out between August 13 and September 8.