Mortgage lifeline plan unworkable, say lenders

Published 16th Jan 2009

Mortgage lenders warned the Government last night that Alistair Darling's plan to offer struggling homeowners a holiday from interest payments will result in new applications being turned down.

The Council of Mortgage Lenders (CML), whose members command 70 per cent of the home loans markets, said that for every repossession they put off for a year, up to 80 new loans would be refused.

In a response to a consultation by the Department for Communities and Local Government, the CML said: “Capital requirements for lenders for mortgages in arrears are far higher than for new mortgages.

Lenders will have to set aside more capital to support borrowers on the scheme.

There is an opportunity cost for lenders in tying up capital that might otherwise be used for new lending.”

The Government's Homeowner Mortgage Support Scheme was designed to allow thousands of borrowers in serious arrears the chance to defer interest payments for a period of two years.

Under Basel II rules, which state how much capital banks need to set aside against different types of lending, the amount that lenders have to hold for each mortgage in arrears is between 30 to 80 times that of a new home loan, the CML said.

Lenders cast further doubt over whether the scheme would be effective in helping to reduce the threat of repossession, warning that house price falls could leave borrowers unable to recover their financial position when the deferral period ends.

The CML also highlighted the fact that only borrowers already five months or more in arrears are likely to be eligible.

Under government guidelines, lenders can repossess a property after just three months.

Source: ' times '

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