The Bank of England is preparing to unveil a plan to inject £50bn of funds into the financial system next week in an attempt to breathe life into the moribund mortgage market, it was reported last night.

The scheme, which the Bank of England has been working on for more than six weeks, follows pleas by mortgage lenders to help unfreeze money markets paralysed by the credit crunch.

Under the scheme, the government is expected to issue bonds which lenders will be able to exchange for packages of mortgages lodged with the Bank as collateral.

According to the BBC, the government bonds could have a maturity of one year but the lenders will be able to roll them over for three years, providing them with the long-term finance they have been calling for. The one-year maturity will mean the bonds will not have to be added to the government's national debt.

The £50bn may not be as much as the lenders were hoping for, as it is just half of the £100bn of new home loans granted each year and even smaller in comparison to the outstanding mortgage market of about £300bn.

Lenders have cautioned that even if the Bank does proceed with the plan to use mortgages as collateral, it is unlikely to mark a return to the situation a year ago when the mortgage market was characterised by cut-throat competition among lenders.

Figures out yesterday showed a further weakening of the housing market. The Council of Mortgage Lenders reported that gross mortgage lending fell at a substantially increased rate of 17.1% year-on-year to £26bn in March, and was down 8% year-on-year in the first quarter of 2008.

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