Arrears and repossessions are expected to rise sharply in 2009
UK mortgage lending fell by 30% in 2008 to the lowest level since 2002, the Council of Mortgage Lenders (CML) says.
Lending totalled £256.4bn last year, compared with £363.7bn in 2007, as the credit crunch triggered a mortgage drought making it harder to get a loan.
Analysts say that even if loans become more accessible, falling house prices are leaving many reluctant to buy.
And mortgage lending fell in December to the lowest monthly level since April 2001, the CML added.
Total lending slipped to £12.6bn in December, down from £14.2bn in November and 47% lower than December 2007.
"December is typically a quiet month in the mortgage market, on top of which the market has been constrained by a shortage of funding and reduced demand," Michael Coogan, CML's director general.
Separate data from Her Majesty's Revenue and Customs (HMRC) said that about 61,000 home sales were completed in December - 41% lower than in the same month in 2007.
However this was a rise from the 52,000 completed transactions seen in November, and in line with levels witnessed seen in the autumn.
Recent mortgage approval figures indicate lending will decline further in the coming months, the CML said, meaning that improvements in lending were unlikely to be seen until later this year at the earliest.
Last week, the government announced its latest plan to encourage banks to increase the amount of money they lend to businesses and individuals - including an insurance scheme to cover bad debts
The move was "essential and welcome", Mr Coogan said, adding that as many mortgage lenders as possible needed to access the help.
"A market solely funded by a few large banks and building societies would be unlikely to have the capacity to match future consumer borrowing demand, or be as competitive in the long term as the UK market has been before the credit crunch," he said.
However, some analysts are sceptical about what impact the government intervention will have.
"With the economic situation deteriorating by the day, the banking system in crisis and consumer confidence at an all time low, it's hard to believe mortgage activity will pick up any time soon, whatever the government does," said Toby Goldblatt of financial adviser search engine Rubii.co.uk.
"Even if banks do start lending more, the question now is will people want to borrow?
"Faced with such uncertainty, the last thing on many people's minds will be moving house."
The latest lending figures were "bloody, bleak and foreboding", said Andrew Montlake of independent mortgage broker Cobalt Capital.
He said that estate agents were reporting more people contacting them or visiting offices, but that this was "neither here nor there if the banks won't lend".
Last month, lenders predicted that the recession would lead to a huge rise in arrears among their borrowers in 2009.
The CML predicted the number of households more than three months behind with their repayments would reach 500,000 this year.
That will be more than double 2008's expected figure of 210,000.