Delivering their annual Mansion House speeches to the City last night, chancellor George Osborne and Bank of England governor Sir Mervyn King, revealed an ambitious scheme to boost mortgage and business lending.
Set to be launched in the next few weeks the scheme provides funding to lenders at lower than market rates with conditions attached forcing lenders to lend to businesses and home buyers.
The Bank of England loans will also come with strings attached, meaning banks must pass on the cheap loans in the form of lower mortgage rates.
However, Which? is calling for greater assurances that the cheap loans will be passed on to home buyers in the form of lower interest rates.
Average mortgage rates have shot up by around 0.5% in the last six months in response to tumultuous funding markets caused by the Eurozone crisis.
Bank shares at Barclays, Royal Bank of Scotland and Lloyds Banking Group all rose this morning in response to the government scheme.
The Council for Mortgage Lenders welcomes the move but says the impact on mortgage lending is unclear.
A spokesman says: “Lenders need to understand more details of the proposals before speculating about specific effects on the mortgage market, and we are ready and willing to work with the government and the Bank as they develop the proposed scheme.”
He adds: “It is helpful to know there will be measures to help reduce any possible disruption to funding markets that could emerge from the current economic turbulence.”
Some in the industry also questioned what the scale of lending will be and how much will be dedicated to small business lending rather than mortgages.
But Ray Boulger, senior technical manager at John Charcol, says the stimulus could make a major difference to gross lending this year.
He says: “It will provide loans with money that would not have been available it addresses the funding problem, which is the key issue with the mortgage market.
“It could be a game changer. Until yesterday I would have predicted gross lending would be lower than last year but now we can expect it to be similar.
Boulger believes that the scheme will take time to get going but it should have an impact around September or October.
He adds: “While banks may start to use the money before they have access to it I expect Q4 will see the biggest change and should be up on last year.”