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.

Debt charities last night accused the Government of leaving tens of thousands of homeowners at even greater risk of repossession. Chris Tapp, director of Credit Action, said: “The payment holiday proposal was made on-the-hoof.

"We are not surprised that it is unravelling and will now probably help an even smaller minority of people. The Government is telling banks to shore up their balance sheets and to help homeowners, but they are not in a position to do both.”

About 168,000 mortgage borrowers were more than three months in arrears at the end of September last year, according to the CML. The number of repossessions is set to rise to about 75,000 this year.

Concern over the scheme came as the CML published figures showing that the number of mortgage approvals has already fallen to an historic low: only 33,000 were approved for those buying new homes last November, down 59 per cent from the year before.

The number of home loans approved for first-time buyers, crucial to the health of the housing market, also fell by more than a half over the year to 12,400, the lowest figure on record since the CML's series began in 2002.

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