Banks have warned they could be forced to cut back drastically on new mortgage lending because of the government’s flagship scheme to offer a state-backed payments holiday for struggling homeowners.

Representatives of the biggest mortgage lenders have also made clear they oppose any move by the government to make the scheme compulsory. Its exact terms are still being finalised.

Gordon Brown launched the mortgage support plan as the surprise carrot in last month’s Queen’s Speech, offering borrowers in arrears the chance to defer interest payments for up to two years. Yet banks have not declared a serious commitment to it beyond vague agreements in principle.

Financial Times