Nationalised bank Northern Rock said that it would offer up to £14 billion extra in new mortgages over the next two years to help kick-start the ailing housing market.
The firm will offer "responsible" loans for first-time buyers and customers who are remortgaging.
The announcement came as the lender said it expected to make a pre-tax loss of £1.4 billion for 2008.
The state-owned bank said 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 this year.
But a 10% bonus was paid to frontline staff because the bank is ahead of target in repaying its huge taxpayer loans. Northern Rock now owes £8.9 billion after repaying £18 billion during 2008.
The bank's extra lending comes after a Government announcement in January that the pace of the Rock's repayments would be slowed to help increase funds available to the mortgage market.
Chief executive Gary Hoffman said: "Since entering public ownership we have concentrated on reducing the balance sheet through a mortgage redemption programme, and have therefore only written a limited amount of new lending.
"I am delighted that we can now return to the mortgage market in a more meaningful way, on a commercial basis."
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Rock is going to increase its lending but this is against a background where a lot of the foreign-based banks have withdrawn.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."
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