The Government's £200m mortgage rescue package will do nothing to ease the suffering of struggling homeowners in negative equity, as they will be barred from the scheme even if they desperately need to raise cash.

Timesonline has learnt that homeowners struggling to pay their mortgage will be prevented from benefiting from the rescue package, announced on Monday, if their property is worth less than the value of their mortgage.

That includes thousands of customers who took out a Together mortgage with Northern Rock, the nationalised bank, which offered cash-strapped first-time buyers loans worth up to 125 per cent of the property value.

A spokesman for Communities and Local Government, the department overseeing the rescue package, said: "Homeowners in negative equity will not be eligible for the mortgage rescue scheme. However, it is important to remember that mortgage rescue is only part of a range of options the Government has put in place to help families at risk of repossession, including expanding free legal representation at county courts, more free debt and advice, and on-going work with lenders to help ensure repossession is only ever a last resort."

Commentators, however, said that the government's stance could leave those in greatest financial distress with little option but to sell their property at a loss or face the risk of repossession.

Ray Boulger at John Charcol, a mortgage broker, said: "The government doesn't seem to have appreciated that many people in danger of repossession will have little or no equity. This just gives the impression that the plan has been cobbled together at the last minute."

Tumbling house prices - down 10.5 per cent in the past year on the Nationwide index - have left growing numbers of homeowners in negative equity. About 70,000 borrowers already owe more on their property than it is worth, research by Standard & Poor's, the credit ratings agency, showed, and thousands more are at risk. Morgan Stanley, the investment bank, recently forecast that two million homeowners could be at risk of negative equity if house prices fell by 20 per cent before 2010.

However, even though they may need financial help, they will be denied aid available to other struggling homeowners.

Under the scheme, homeowners facing the threat of repossession will be able to sell a share of their property to a housing association or take out a loan to reduce the size of their mortgage.

In the worst cases of hardship, the housing association will be able to buy the home completely, allowing the homeowner to stay put as long as they pay rent - called "sale and rent back".

The scheme has already been criticised for not going far enough. The government said it will help up to 6,000 vulnerable homeowners, although the number of people in need of financial help is thought to be much greater.

Paul Bettison, spokesperson on housing at the Local Government Association, said: "The reality is that the Government is only really able to scratch the surface. Town halls are going to have a real job managing expectations locally, because the money being made available won't really go that far."