Lenders warn of £400bn funding gap as mortgages fall back again

Britain's biggest mortgage lenders have issued a thinly veiled threat that the country's housing market could be plunged into a new downturn unless the Government and the Bank of England do more to help the sector to improve its funding.

Data released by the Council of Mortgage Lenders yesterday revealed that they lent just £10.2bn to homebuyers and people remortgaging during April, 12 per cent less than in March and the worst figure for the month for a decade.

While the Easter break will have had a marginal effect on the figures – and uncertainty about the general election may also have depressed demand – the CML said that although more mortgages were now becoming available, there was little sign of any improvement in total lending. In fact, lending during the first four months of the year was actually 6 per cent down on the same period of 2009.

Michael Coogan, director general of the CML, warned that many mortgage lenders faced a funding crunch. Not only is the sector struggling to attract retail savers with interest rates at all-time lows, the Bank of England is insisting that it will close support plans such as the special liquidity scheme, introduced at the height of the financial crisis, from the beginning of 2011 onwards. The effect will be to withdraw around £400bn of funding for lending from the sector.

"We still do not know how the incoming Government plans to address the funding gap looming over the next few years in the mortgage market," Mr Coogan said. "It is important that the new Government grasps this nettle. Unless funding issues are addressed, any recovery in lending may well be curtailed as the repayment date on the support schemes gets closer."

There are already some signs that the subdued mood in the mortgage sector is beginning to damage the housing market. HM Revenue & Customs said yesterday that while the number of home sales in the first four months of the year was up 26 per cent on 2009, completed sales actually fell during April, down 2,000 from March to around 71,000.

The Bank of England's latest Trends in Lending report suggests that decline may be set to continue. "Data from the major UK lenders indicate that their approvals for house purchase edged lower in April," the Bank said. "Estate agent contacts reported that the availability of mortgage finance had continued to suppress demand for houses among first-time buyers."

While lenders are increasingly concerned about the withdrawal of support mechanisms from next year onwards, they are also coming under renewed pressure from the Government to lend more.

The new Government has said it will set specific lending targets for the banks in which it holds sizeable stakes, covering advances to both individuals and businesses, and that it will pressure private-sector lenders too.

Corporate lending trends appear to be no healthier than in the mortgage market. The Bank of England warned that the total stock of lending fell by 9 per cent in March, with borrowing now at its lowest levels for more than a decade.