Alistair Darling is set to back a £100bn gamble with taxpayers’ cash in a bid to kick-start the mortgage market by effectively underwriting the majority of new mortgages in the UK to encourage big investors to give money to lending banks.

The proposed scheme means the UK Government would guarantee mortgage bonds, where banks parcel up individual home loans and sell them to investment firms. When the system works properly, banks have a source of money to loan to customers and investors get a return.

But with many investors currently reluctant to risk their money on mortgages, Darling is preparing to guarantee the value of mortgage bonds to get the cash flowing again. The total value of new mortgages involved has been estimated as up to £100bn, leading to claims that the scheme poses too many risks to taxpayers while offering too few rewards. And the new measures, coming on top of a £500bn scheme to guarantee banks’ borrowing and the £12bn cut in VAT announced in October, will raise further fears over the extent of the Government’s spending in the face of the credit crunch.
The latest moves follow growing evidence that housebuyers are experiencing chronic difficulties getting mortgages. Figures from the Royal Institute of Chartered Surveyors (RICS) show new buyer inquiries are at their highest level since October 2006, but new mortgage approvals by banks are at a record low. From a high of 130,000 a month in mid-2006, approvals have fallen to fewer than 30,000 a month.