The government has announced that the nationalised lender Northern Rock is to resume lending in new mortgages with up to £14 billion by 2011. This will made made up from an expected £5 billion this year and a further £9 billion in 2010.
The mortgages will be funded through new deposits, existing business and more money from the government.
The plans come as part of the changes due to begin taking effect with the lender after the government decision to reverse the slow-down of its loans.
Chancellor Alistair Darling spoke of the new moves to be one of several steps being taken to rebuild the banking system.
"It's repaid about £18bn of the loan the government made, and I said in January this year that because of the problems the mortgage market faced, instead of looking to wind down its business, it would be better for Northern Rock to maintain lending."
He defended his decision to allow the lender to resume offering 90% mortgages in order to kick-start the mortgage market and believes the bank has learned from its mistakes.
Greg Hands, shadow treasury minister, said to the BBC that the reversal of policy demonstrated the chaos at the centre of government decision-making.
"We've been calling on the government for some time to free up credit in the economy and to make sure credit flows. However, for Northern Rock it is a bit of a volte-face because until now Northern Rock had been under orders to wind up its mortgage operation and essentially to close down business. I think there will be a contrast between existing customers who are facing repossession with all these thousands of new customers who are getting very generous terms," he said.
But Investment analyst Justin Urquhart Stewart, from Seven Investment Management, welcomed the plans and hoped this will inspire other banks to take similar steps.
He said to the BBC: "They've been quietly off-market, being able to reconstruct themselves to come back again and be able to provide a model, possibly as the world's most boring bank, for the other banks to try and imitate. And it will provide more capacity into the system so money starts being lent again and that's what the British economy needs desperately."
He also confirmed that the lender would be willing to lend its customers up to 90% of the value of their home. Many other lenders are reluctant to offer more than 75%.
Darling told the BBC Today Programme: "Northern Rock will not do 100% mortgages. They had their fingers badly burned and more importantly so did many of their customers. They can go up to 90%, but will have to take that judgement based on individual circumstances."
The new lending program came as an option last month after the government announced steps to regenerate the stagnant mortgage market.
Northern Rock was nationalised in 2008 following its collapsed in 2007, which came as a result of panicked investors who withdrew deposits with the bank when it was revealed that the lender had looked to get help from the government.
As part of the new policy, Northern Rock is to be restructured by managing new and existing mortgages separately.
