The Government plans to withdraw £300bn in financial support over the coming 4 years and this has led to the leading trade body for contractor mortgage lenders claiming that the entire housing market in the UK could completely grind to a halt.

It seems to be something of a catch 22 situation. Banks are encouraged to lend based on deposits but they’re not going to save enough to cover demand and yet if the Government keeps stepping in to help, the national debt will get even larger.

The Government’s Special Liquidity Scheme has already provided the banks with almost £200bn since the economic crisis kicked in. This scheme allowed them to exchange mortgage bonds for cash. Another £100bn came from the Credit Guarantee Scheme which allowed lenders to raise debt from the markets.

However, this funding has to be repaid in 2 instalments; the first due in 2012 and the second in 2014. The CML has now written to the Government warning them that the lack of access to funds could force them to stop lending.

Of course the government’s ultimate aim is for banks to lend money that they actually possess, which of course makers sense because the reason we got into this mess in the first place was because banks borrowed huge sums on the wholesale market. But we simply aren’t saving enough. The Bank of England reckons the figure is around £6bn as opposed to the £300bn needed to make the banks self-reliant. So it looks like, one way or another, this problem is going to remain with us for some time.

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According to reports from the Council of Mortgage Lenders, providers of contractor mortgages in the UK face a staggering £300 billion shortfall between the amount they can lend and the value of their saver’s deposits.

Currently, this deficit is being funded by the government but they have already stated such schemes will not be available after 2014.

Long term, this could limit the choice for consumers and affect first-time buyers and those at the bottom of the chain since the majority of loans would only be available to people with large deposits.

Before the credit crunch, most of the funding deficit was made up using wholesale mortgage debt but when this dried up the government was forced to step in and implement the credit guarantee and special liquidity schemes.

The Council of Mortgage Lenders have already stated that it is unlikely that wholesale mortgage markets will return to pre credit crunch levels, and that retail savers alone are not enough to bridge the gap. It is now calling on the government to implement new measures to encourage wholesale funding to prevent a widespread decline in the number and availability of mortgages for personal customers.

It added that a “clear strategy” was now required to ensure the sustainability and future prosperity of the UK mortgage market.

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