Lenders have warned the government’s scheme to keep people facing repossession in their homes could put further pressure on new lending.

The government has proposed borrowers struggling to keep up with repayments on their mortgage could defer part of their interest payments for up to two years, with the government guaranteeing the risk to the lender.

However, the Building Societies Association (BSA) and the Council of Mortgage Lenders (CML) have warned the scheme will tie up cash needed for new lending, worsening the credit crunch.

Paul Broadhead, head of mortgage policy at the BSA, said: “It is vital that government understands that lenders have to hold increased capital for accounts in arrears, and if not considered fully, this scheme could have the unintended consequences of further stifling new mortgage lending.”

The amount of capital that a lender has to hold for each mortgage in arrears is between 30 and 80 times that of a new mortgage, the CML added, warning this will have a potential impact on new lending.

In addition to the extra burden on lenders to hold back cash that could be used for new lending, customers could be putting themselves at risk in the future, the CML warned.

CML director general, Michael Coogan, said: “This scheme is not a payment “holiday” or a “free lunch”, but rather a payment deferral.

“The future impact on borrowers’ repayments may be very significant if they defer a high proportion of their interest, and the scheme is not without the risk of potentially unwelcome impacts on lenders.”

Both groups welcomed government intervention to help those facing repossession but warned the government needs to address the problems.

A spokesperson from the Treasury conceded the scheme could have an adverse effect on the market but added details of the plan are still being worked out to avoid this.

“This is an important scheme that will help thousands of households to avoid repossession and we are determined to ensure it works as well as possible.

“That’s why we are working carefully with lenders and the FSA to get the details right, so we can have the scheme up and running at the earliest opportunity.”