Government's mortgage payment holiday plan could restrict lending

14 January 2009 / by Rachael Stiles
Mortgage lenders have warned that they might have to restrict the amount they lend because of the Government's mortgage support plan which offers struggling home owners an interest payment holiday of up to two years.

With the scheme, the Government aims to help those homeowners which are struggling to keep up with the repayments on their mortgage by allowing them to take a break from paying interest on the loan for up to two years.

The Government will guarantee the interest payments, but lenders have suggested that this could curtail the amount of spare cash they have to offer new mortgage customers and subsequently reduce their lending levels.

Banks have expressed only vague agreements to the plan, the exact terms of which are still being finalised, and have made clear that they will oppose any move to make the scheme compulsory.

The Council of Mortgage Lenders (CML) has warned the Treasury that there could be a dramatic fall in mortgage lending, the Financial Times has reported, as an unintentional by-product of the plan.

Effectively, customers who take up the offer of a two year interest payment holiday will be classed as being in arrears, and mortgage lenders have to hold more capital for loans which are in arrears for an extended period of time than they do for new lending.

The mortgage payment holidays will therefore tie up banks' capital which could otherwise have been used for new mortgages, the CML said, with each mortgage in arrears holding enough capital to potentially finance at least 30 new home loans.

Falling interest rates are also forcing lenders to do a balancing act between borrowers and savings account customers, which could also restrict the amount of capital that banks have to lend.

Michael Cogan, director general of the CML, explained that "While lower mortgage rates provide borrowers with the opportunity to repay their mortgage debt more quickly to reduce the term, lower savings rates impact lenders’ ability to attract deposits and maintain the flow of mortgage lending in 2009."

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