A SIGNIFICANT proportion of the £14bn of mortgage lending announced yesterday by Northern Rock will come from new taxpayer funding.

Although the North-Eastbased bank would not confirm the amount, it is believed to be about £10bn.

The nationalised lender is now highly unlikely to pay back its Government loan by next year, as planned.

But the bank said the announcement was good news for customers, who would benefit from an increase in mortgage availability. It hopes to offer some mortgages at 90 per cent to help first-time buyers.

It is a major shift in the bank’s lending policy, which had seen existing mortgage customers actively encouraged to leave when their mortgage deals matured.

Chancellor Alistair Darling said 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”.

Northern Rock will lend about £5bn this year and up to £9bn more next year, depending on demand.

The bank’s chief executive, Gary 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 about £70bn last year and Northern Rock was responsible for about half of that fall.

“Having made very good progress against our objectives last year, we are taking the shackles off Northern Rock,” he said.

Since the start of last year, the bank has paid back £18bn of the £26bn Government loan, made when it was nationalised, with the amount still owed standing at £8.9bn.

Although the bank confirmed it would be asking the Government for more cash, a spokesman said he could not comment on what proportion of its new lending would come from Government funding while it was going through a “detailed planning exercise”.

He said that it also had retail deposits and wholesale funding from other banks to call on.

But an industry insider said it was likely that a “significant”

proportion of the lending, probably about £10bn, would come from Government funding.

The bank said it would have to push back plans to repay the Government loan by 2010.

Four thousand front line staff, earning on average £21,000 a year, received a ten per cent bonus last month because the bank was ahead of its repayment target, but the new lending is likely to have a knock-on effect on plans to pay them a further bonus when 75 per cent of the Government loan was repayed.

The spokesman said: “The previous bonus scheme was part of a very clear mechanism.

The fact we are slowing down repayments means we will look at the bonus scheme for staff and adjust it to make sure it is in keeping with any new business plan.”

The bank also announced that executives and senior management would receive no cash bonuses for last year and this year, apart from payouts obliged under contracts, and their salaries will be frozen.

But 400 junior managers will gain a ten per cent deferred bonus in the form of a loan note payable next year. A Northern Rock spokeswoman said the bank had not come under pressure from the Government to change its executive pay scheme. “In the changed economic circumstances we just felt it was the right thing to do,” she said.

The bank will announce further details of the executive pay scheme next week.

When it announces its financial results next Tuesday, Northern Rock is expected to report a loss before tax for last year of £1.4bn, driven by a £900m bad debt charge on its loan book.

Its share of borrowers more than three months behind on mortgages jumped to 2.92 per cent by the end of last year – compared with 1.87 per cent three months earlier.

But retail savings balances showed good growth, rising to £19.6bn compared with £10.5bn at the start of the year.