The UK mortgage market is set to shrink by nearly 20% as the credit crunch tightens its grip on lenders, according to a report.

Market analyst Datamonitor forecasts a bleak outlook for the UK lending market, with the the credit crunch creating a shrinking number of products and higher prices. Fewer lenders are expected to operate and more consumers will be refused credit.

A fall in mortgage lending of 19.3% during 2008 is predicted by the group, with total advances of £294 billion made during the year.

There has been a steady decline in mortgage advances since the beginning of this year, according to figures from the Bank of England.

Tighter lending criteria by lenders have also made it difficult for people with only small or no deposits to secure funds.

But with several major lenders cutting their rates several times during the past few weeks, there are signs that competition is returning to the market.

Datamonitor said total mortgage advances reached just £149.5 billion during the first six months of 2008, 18.9% below advances made during the same period of the previous year.

It said with the credit crunch showing no sign of abating and lenders remaining cautious, mortgage lending looked set to fall by 19.3% during the year as a whole, followed by a further drop of 3% in 2009.

Karina Purang, financial services senior analyst at Datamonitor, said: "The consumer lending market has moved beyond recognition.

"Lending markets are currently beset by high market uncertainties with the ongoing credit crunch, falling house prices, rising arrears and repossessions and indebted consumers struggling to find credit."

But she added that while the current market turbulence was causing problems for both lenders and consumers, it had enabled lenders to reprice their products to increase their margins.

Consumer credit is expected to fare slightly better, with total lending through credit cards, overdrafts and loans falling by 3.2% this year to £198.96 billion, before recovering to grow by 1.4% during 2009.

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