Previously obliged to limit the amount it was lending to prevent it taking an unfair advantage due to its state-ownership, and so that it could repay its £27billion loan from the Treasury, Northern Rock will now boost its mortgage book as part of the Government’s initiative to ease lending.

The money will come from a variety of sources, the Chancellor Alistair Darling said, including new deposits and repayments of existing loans, but admitted that more money from the taxpayer will be needed as part of its efforts to “rebuild the banking system for the future.”

Speaking on the BBC Radio Four’s Today Programme, Mr Darling said that as the Government tries to “get lending going again” he is “anxious that the money is there to lend” and enable people to buy houses.

While Northern Rock has already repaid about £18billion of its Government loan, the bank said in January – when it first announced that it would be changing its mortgage strategy – that the rate of repayment will slow down as it boosts mortgage lending instead.

When questioned about what loan to value mortgages the bank will be allowed to lend, the Chancellor said that it would be issuing 90 per cent loans but that it would no longer offer “ridiculous” 100 per cent mortgages.

The move to increase Northern Rock’s mortgage lending is one of a series of measures to boost lending, both to businesses and consumers.

In a u-turn on its previous limitations on lending, after it collapsed in 2007, Northern Rock will now be able to retain more of its customers, instead of pushing them onto other lenders when they come to the end of their mortgage deals.

Mr Darling explained that “because of the problems the mortgage market faces, instead of looking to wind down its business, it would be better for Northern Rock to maintain lending.”

The BBC’s business editor, Robert Peston, is dubious about having the taxpayer “permanently standing behind the banks” to increase mortgage lending. On the Today Programme, he questioned whether there is an “appetite” for the number of mortgages that the £10billion of new Government loans to Northern Rock will create.

Michael Coogan, director general of the Council of Mortgage Lenders (CML) said of the announcement that “While other lenders will no doubt be watching carefully to assess the competitive impacts of Northern Rock returning to the market as an active mortgage lender, in overall market terms anything that improves the supply of lending is a positive.”

“Mortgage redemptions funded nearly all the £18 billion of the loan that Northern Rock repaid to the government. This was £18 billion that had to be absorbed by the rest of the other mortgage lenders. By removing this market pressure, other lenders as well as Northern Rock should experience an increased capacity to lend to other borrowers.”

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