Up to 50,000 families could lose their homes over the next two years and a "mortgage time bomb" will explode if the European Central Bank raises interest rates, a charity set up to protect heavily indebted homeowners has warned.

The Phoenix Project also accused the Government of failing to acknowledge the seriousness of the mortgage arrears crisis and said banks had shown themselves to be rigid and inflexible when dealing with borrowers in distress.

The charity said that despite a perception – created in part by the Central Bank and the Government – that the worst of the mortgage crisis had been resolved, tens of thousands of people were still struggling to deal with their debts and the numbers making contact with the charity had increased by more than 30 per cent last year alone.

The charity, which offers free advice, counselling and financial help to borrowers in mortgage difficulties, warned of the consequences of an increase in the ECB interest rates from their historic lows of 0.05 per cent.

“If there is an increase to the historic average of 3.75 per cent many borrowers who are now meeting full repayments will fall into arrears,” it said.

Tom O'Reilly, one of the charity's qualified financial advisers, said in his experience banks had been following the spending guidelines laid down by the Insolvency Service of Ireland too closely.