Gordon Brown’s rabbit out of the hat to give homeowners who lose their jobs a mortgage holiday on loans of up to £400,000 caught bankers and borrowers by surprise yesterday and raised many more questions than the Treasury could answer.

In spite of government claims that the banks had signed up to the scheme, the most common reaction was that they had given it the nod only in principal. Bankers, already under intense pressure to go easy on repossessions, were told of the decision only on Tuesday. “You can tell Peter Mandelson’s back in town,” said one senior banker. “The press are being briefed before we’ve even been properly consulted.”

There were still questions about who would be eligible, how the costs would be shared between government and banks, how the money would be paid back and who would shoulder the pain if it was not. In essence, struggling borrowers hit by redundancy, say, will be able to stop paying mortgage interest for up to two years, while they find a new job or a fresh source of income. At that point, the missed interest payments will be added to the outstanding debt. If they fail ultimately to pay it off, the Government picks up the tab for the “rolled-up” portion of interest payments it has guaranteed.

The upside is that the scheme could save thousands from being forced from their homes. There were 80,000 repossessions in 1991, the worst year of the last housing downturn, and similar levels have been forecast for next year. In theory, the breathing space will be sufficient for borrowers to find new work and so prevent the trauma of repossession. The policy should also prevent the fire sales of tens of thousands of homes, which would depress the housing market further.

Some banks, including Royal Bank of Scotland, which owns NatWest, and Northern Rock, have promised not to repossess anyone’s home for at least six months from the date they start failing to meet payment demands. That won’t make much difference because repossessions usually take much longer. The Government’s proposed two-year moratorium gives much more of a breathing space.

The downside risk is that the policy merely defers the pain – for the borrower, the lender and the wider economy. The Treasury expects the bill for the taxpayer to be only £100 million, although it concedes that it could be as much as £1 billion.

If house prices are in for a prolonged downturn, the policy could backfire. Both borrower and lender might be better off accepting repossession now rather than taking advantage of the breathing space only to capitulate two years later and find the home selling for even less. One other unintended consequence is that the policy could further squeeze the supply of new mortgage lending. Banks will receive less in mortgage payments during the moratorium, leaving them with less to lend out and the mortgages of those taking part will increase as the interest is rolled up, forcing banks to allocate more capital to them, with less for new lending.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts