Northern Rock is set to resume lending with up to £14 billion in new mortgages by 2011, the government has announced.

Chancellor Alistair Darling said Northern Rock will be allowed to lend up to 90 per cent of the home’s value, although most banks are refusing to lend more than 75 per cent.

About £5 billion in new mortgages will be available this year and up to £9 billion from 2010.

Mr Darling told BBC Radio 4′s Today programme: “It’s repaid about £18 billion 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.”

Some of the funds will come from the taxpayer, the chancellor admitted, while Northern Rock will be given more time to repay its loan to the Bank of England.

The bank was nationalised last year after the Treasury’s search for the buyer failed and six months after the initial reports Northern Rock had approached the Bank of England for an emergency loan led to a run.

Northern Rock was instructed to run its mortgage book down and stopped new lending, to repay the £30 billion loan as soon as possible.

However, some critics said the sudden withdrawal of mortgages contributed to the sharp fall in house prices.

“Foreign banks have withdrawn from the market. What I want to do is use Northern Rock to fill that gap,” Mr Darling told the BBC.

Greg Hands, the shadow Treasury minister, said the announcement was a “volte-face”.

He said: “I think there will be a contrast between existing customers who are facing repossession and all these thousands of new customers who are getting very generous terms.”