Government plans to scrap taxes on mortgage insurance protection policies sold to millions of homeowners were yesterday welcomed by lenders.
But they warned that any decision to raise interest rates, expected to be made by the Bank of England on Friday, will force them to push up the cost of home loans.
If, as predicted, the decision is to lift base rates half a point to 7.25 per cent, this will be matched by a 0.25-point rise in mortgage rates, adding about £11 a month to the cost of an average £60,000 home loan.
Lenders said this would weaken further an already depressed housing market.
Their warning yesterday came in the wake of figures from Halifax Building Society showing that house prices dropped by 0.3 per cent in April. In the past 12 months, house prices have dropped by 1.4 per cent.
Separate figures from the British Bankers Association showed a slow-down in mortgage borrowing last month, particularly among first-time buyers. Although lending rose by 31 per cent in March up to £1.45bn compared to February, this was mostly seasonal and was down on the same period last year.
The announcement by Kenneth Clarke, Chancellor of the Exchequer, means homeowners will not have to pay up to £10 a month more - on an average £60,000 loan - to protect against unemployment or sickness.
Social security changes in October mean new borrowers will not receive mortgage interest payments for the first nine months if they are unemployed.
Margaret Schwarz, chief economist at Abbey National, said no decision on mortgage rates could be made until after the meeting on Friday between Mr Clarke and Eddie George, Governor of the Bank of England.
"The Government faces a dilemma in that there are inflationary pressures in the economy," Ms Schwarz said.
"On the other hand, tax increases have meant that there is low confidence. People do not believe the recession is over."