The U-turn would be embarrassing for the Government, but less so than being accused of pushing up rates when only a week ago it was asking the German Bundesbank to avoid any action which would have that impact.
The bond, which offers basic-rate taxpayers 7.75 per cent interest after tax - more than is generally available from building societies - has already forced the Cheltenham and Gloucester, Britain's sixth-biggest building society, to raise the rate it charges borrowers by 0.24 per cent to 10.99 per cent in order to offer a higher rate to savers.
There are fears that other societies, operating on slim margins between investment and mortgage rates, may follow suit. Abbey National, the second largest mortgage lender, warned on Friday that it may be forced to raise its home loan rates.
The societies are particularly concerned that the new National Savings bond is the first aimed directly at the lower-rate taxpayer, the mainstay of building society saving. The Treasury set the rate high to boost National Savings receipts and thus help fund higher Government borrowing.
Even before the C&G's move, the Council of Mortgage Lenders, which represents most organisations involved in mortgage lending, had asked for an urgent meeting with ministers from the Department of the Environment and the Treasury to discuss its concerns about the seriousness of the current property crisis.
Lenders are pushing for a reform of mortgage tax relief to kick-start the market. They are coming to believe that this is essential even if the trade- off may ultimately be its abolition. They have become convinced fiscal measures are the only way to get the market moving now that lower mortgage rates in the near future look unlikely because of the need to maintain the value of sterling in the face of high German interest rates.
Tim Melville-Ross, chairman of the CML and chief executive of the Nationwide building society, said that boosting mortgage tax relief was at the top of his list, but he also wanted to see an extension of income support to those in work but on low incomes, and an easier climate for housing associations to buy properties for rent.
Donald Kirkham, chief executive of the Woolwich, called for the Government to double tax relief to pounds 60,000 for five years, but to restrict it to those - possibly first-time buyers - who applied in the next six months or so to limit the cost of the exercise.
However, the Treasury is firmly opposed to any extension of tax relief, which cost pounds 6.1bn in 1991-92. So, in an effort to win the Treasury's support, some lenders are considering suggesting a more drastic approach.
The Halifax, the UK's largest building society, is discussing whether mortgage tax relief should be phased out in return for a lump sum payment to first- time or new borrowers.
While such a move would initially be expensive for the Government, in due course it would lead to savings for the Treasury, which has long been in favour of abolishing mortgage tax relief, which it regards as an expensive and unjustifiable distortion of the market.
The value of such a payment if a five-year phase-out of tax relief were chosen would be around pounds 3,120, according to the actuaries Bacon & Woodrow. With the average first-time buyer paying about pounds 47,000, the lump sum could act as a deposit of 5 to 10 per cent. Deposits are a growing problem for new buyers because few lenders are prepared to grant 100 per cent mortgages, especially as mortgage indemnity insurance has become harder to obtain and expensive. First-time buyers, who are responsible for about 40 per cent of all purchases, are the key to any recovery in the market, according to John Wriglesworth, analyst at the brokers UBS Phillips & Drew.
The dramatic collapse in house sales - from about 2.1 million in 1988 to an estimated 1.2 million this year - means that up to 600,000 first-time buyers, who under normal conditions might have been expected to purchase their first property in 1990 and 1991, failed to do so, he says.Reuse content