The decision to axe the Funding for Lending Scheme (FLS) for residential mortgages will cut lending and hit buyers struggling to get onto the housing ladder, experts have warned.
The mortgage market could slow dramatically next year, due to the combined impact of scrapping FLS and the forthcoming Mortgage Market Review (MMR).
And it raises the spectre that Help to Buy could meet an equally swift fate one day.
Richard Sexton, director of e.surv chartered surveyors, said: "FLS was the spark that set lending alight, opening up the mortgage market to a host of new borrowers. Stopping the scheme could restrict lending, and dampen the hopes of millions.
"FLS helped put a lid on rates, and encouraged banks to lend to borrowers with smaller deposits. It made lending far more accessible.
"Help to Buy will continue to help borrowers with small deposits access the first rung of the ladder, but if mortgage rates rocket, monthly payments will become the bottleneck for would-be buyers, rather than building a deposit.
“There’s no doubt, banks will be passing on their added costs to borrowers. And borrowers with smaller deposits will be the ones to pay, as mortgage rates start to inexorably tick upwards.
"Lending could already slow in the New Year, with MMR regulations set to come into play in April. But removing FLS will have an even greater impact.”
Stevie Hicks, managing director of home purchase company Genie, said: “This is likely to make getting on the housing ladder even harder than it is already for those aspiring to own their own homes."
Robin King, director of Move with Us, said it was positive news that the Bank of England has enough confidence in the housing market to withdraw funding.
"However, its reasoning that FLS has been revoked to avoid a housing bubble is unfounded as there are no signs of a bubble outside of Greater London.
"Our figures demonstrate that property prices are growing steadily in some regions in the UK such as the South East and East Anglia, as we would expect in a recovering economy.
"In other regions such as Scotland, Yorkshire and Humber and the North East, however, the average asking price is either static or declining and these are the areas that will be hit the hardest by FLS being scrapped."
Peter Williams, executive director of the Intermediary Mortgage Lenders Association (IMLA), warned that Help to Buy could meet an equally swift fate one day. "IMLA has long argued that we want phased and planned withdrawal rather than sudden policy change.
"We must hope today’s somewhat unexpected announcement of the removal of further FLS support does not trip up the mortgage market recovery.
"We draw some comfort from the fact that existing FLS funding is repaid over the next four years, which will help cushion the impact of the change."
“Finally, this shows the Bank in action. It has often been criticised for being slow and behind the market, but suggests the Bank might be equally decisive about amending the Help to Buy scheme in the light of market conditions.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, said the decision to scrap FLS is likely to have a disproportionate impact on smaller lenders who may have been more reliant on these cheap funds than the bigger players.