Lloyds TSB, one of Britain’s biggest mortgage lenders, came under fire yesterday after it emerged that it was stopping borrowers switching from repayment mortgages to interest-only deals. The lower monthly repayments of interest-only mortgages are often a lifeline for hard-pressed borrowers.

The disclosure came as figures showed that repossessions surged by 71 per cent in the three months to June.

Switching from a repayment loan to an interest-only deal, which could save a borrower with a £150,000 loan more than £200 a month, is an option that lenders can offer borrowers who are struggling to meet repayments to try to keep them in their homes.

Cheltenham & Gloucester, the mortgage arm of Lloyds TSB, introduced its new mortgage policy a week after Gordon Brown announced measures to ensure that lenders repossess homes only after examining all alternatives, including switching to an interest-only deal. Outlining a raft of tight new lending criteria in a note to brokers, the lender said: “Existing customers with their lending on a repayment basis can no longer switch their payment method to interest only.”

Frances Walker, of the Consumer Credit Counselling Service, a debt charity, said that the move was very disappointing. “This is not in the spirit of the new scheme announced by the Government last week,” she said.

Lloyds TSB’s stance is a blow to Ali-stair Darling’s attempts to boost the availability of home loans, which was further undermined last night as Tim Besley, a member of the Bank of England’s rate-setting committee, said that the mortgage market may never return to how it was last year.

More than 11,050 homeowners were evicted by lenders between April and June, up from 6,476 in the same period last year, figures issued by the Financial Services Authority show. Borrowers at least three months behind with payments rose 16 per cent to 312,000. The Council of Mortgage Lenders has said that repossessions are set to rise by half to 45,000 this year, and that the number of borrowers losing their homes could rise again next year.

Official figures also showed that house prices fell again in September, with £4,000 wiped off the value of the average property. The average house price in England and Wales is now £168,814, down 8 per cent from September last year, Land Registry figures show. The continued fall in prices is putting more families into negative equity. Already, 330,000 homeowners owe more on their property than it is worth, the Bank of England said yesterday, adding that if prices fell by a further 15 per cent, as many economists predict, 1.2 million homeowners will be pushed into negative equity.

Lloyds TSB last night appeared to be backtracking. A spokeswoman said: “If a customer is in financial difficulty, then switching to interest-only will still be an option.”

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

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