Banks are turning away more than £1bn of mortgage business because they are refusing to lend to people on moderate incomes wanting to buy shared ownership homes, it was claimed today.

The National Housing Federation (NHF), which represents England's housing associations, says many banks are refusing to lend to first time buyers and key workers - because they mistakenly view deals for shared ownership housing as potentially sub-prime.

The NHF estimates that during 2008/9, the banks turned away up to £500m of valid business on shared ownership products - resulting in 9,000 low cost homes being left vacant, even though around 90,000 households had expressed an interest in moving into them.

It is feared the banks will turn away the same amount of potential business this year - leaving thousands of first time buyers and key workers without the chance to buy their own low cost home.

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The Government, which has poured tens of millions of pounds into the properties, must now ensure that the state owned and partially state owned banks take on a greater social responsibility and make lending on shared ownership homes a key priority, the Federation said.

Although the demand for shared ownership homes is soaring, the banks are being increasingly cautious, with many taking the view that because shared ownership is designed for people from lower income brackets they are more risky than other types of lending.

The Federation says that the prejudice of the banks is not borne out by fact - as households purchasing low cost homes are no more likely to default on their mortgages than others.

NHF Chief Executive David Orr said: "The excessive risk-taking of the banking sector, that heralded the downturn, has been replaced by excessive caution.

"Lenders are now reluctant to provide mortgages for shared ownership, because of a prejudiced assumption that its buyers - people on low and moderate incomes - are more likely to default on their mortgages.

"As a result, thousands of lower income households, with a good credit rating, are being denied the opportunity to part-buy decent homes.

"The Government should ensure the banks that have been bailed out with public money, such as Northern Rock, Lloyds TSB, RBS and Bradford and Bingley, take on a social purpose and lend to people on low-to-moderate incomes who can afford to buy shared ownership homes."

(CD/JM)