The head of nationalised Northern Rock today said he was ready to "take the shackles off" the lender as it announced up to £14bn extra in new mortgages.
Chief executive Gary Hoffman ruled out loans worth 95 per cent or more of property values but hoped to offer some mortgages at 90 per cent to help first-time buyers.
Northern Rock - which expects losses of £1.4bn for 2008 - has been driving away customers to pay off £26.9bn in taxpayer loans racked up following its Bank of England rescue in 2007.
But the firm's move back into the wider market with billions more in taxpayer funds represents the Government's most direct intervention yet to tackle the current drought in mortgage financing.
Mr Hoffman said the Rock's return to "responsible" wider lending would make a "small but important contribution" to the mortgage market.
"Net new lending shrank by around £70bn (in 2008) and Northern Rock was responsible for around half of that fall.
"Having made very good progress against our objectives last year we are taking the shackles off Northern Rock," he said.
Northern Rock will lend around £5bn this year and up to £9bn more in 2010, depending on demand.
Chancellor Alistair Darling earlier told the BBC: "Northern Rock is going to increase its lending but this is against a background where a lot of the foreign-based banks have withdrawn.
"So what I want to do is use Northern Rock to help fill the gap but in the rest of the banking system we still have a job of work to do to make sure we can rebuild those banks for the future."
The announcement came as the lender said a deteriorating economy sent loan defaults spiralling.
It paid back £18 billion to the BoE last year but said the losses were driven by a £900m bad debt charge on its loan book.
Northern Rock's share of borrowers more than three months behind on mortgages jumped to 2.92 per cent by the end of 2008 - compared with 1.87 per cent just three months earlier.
The arrears rise came as the group's better-quality borrowers fled elsewhere to more competitive rates earlier in the year - leaving the firm with the more vulnerable customers.
The lender was infamous for its Together mortgage product which would lend customers up to 125 per cent of the value of their homes before the credit crunch struck.
A restructuring is set to see its poorer-performing loans spun off into a separate legal entity to protect its capital position, shored up with £3bn from the Treasury last year.
The state-owned lender meanwhile sought to defuse a fresh row over controversial bank bonuses after announcing that executives and senior management would receive no cash bonuses for 2008 and 2009 - apart from payouts obliged under contracts. Their salaries will also be frozen.
But a 10 per cent cash bonus was paid to frontline staff because the bank is ahead of target in repaying its taxpayer debt, and around 400 junior managers will gain a 10% deferred bonus in the form of a loan note payable in 2010.
Senior individuals important to the Rock's future will also receive a loan note repayable in 2010 but the award is subject to 100 per cent clawback, the firm added.
Northern Rock made further progress on rebuilding its savings deposit base - impacted by the run and uncertainty over the bank's future before it was taken into public ownership a year ago.
Deposits rose to £19.6bn compared with £10.5bn at the beginning of 2008.
Mr Hoffman said 2008 was "an extremely difficult" year for the firm but added: "The company has been substantially restructured and we are in a much better shape to move forward from here."Reuse content