The mortgage market is set to benefit from a new scheme which should increase the number of new deals available to homeowners, the Chancellor announced today in the Budget.

The Government will guarantee £50 billion worth of mortgage-backed securities, which banks use to raise wholesale funding to provide new home loans, after the scheme was approved by European regulators.

Mortgage experts have welcomed the plans, which formed a key plank of the recommendations in a report into the mortgage market by Sir James Crosby, which was released in November.

It is hoped that the guarantee will kick-start the market in residential mortgage-backed securities, which has collapsed since the credit crunch first took hold in 2007. Before the credit crunch, UK lenders used to fund a third of new mortgage lending through securitisation.

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A lack of wholesale funding has seen the mortgage market shrink to historically low levels in recent months. Last month new mortgage lending increased by 16 per cent compared to February but was still 52 per cent lower than March 2008, figures released by the Council of Mortgage Lenders show.

Melanie Bien, director of Savills Private Finance, a broker, said: "This move is crucial and long-awaited. There is simply not enough lending being done by balance sheet lenders – the reopening of the securitisation market is vital in encouraging more lenders to lend, not just the small handful part-owned by the government.

"But is £50bn enough and will it be available to smaller lenders, not just the bigger lenders who are already lending?"

Alistair Darling also announced an extension to changes made to the Support for Mortgage Interest (ISMI) scheme, designed to help homeowners claiming income support or other benefits and improved mortgage rescue, which provides a solution for borrowers who can no longer afford to pay their mortgage.

The Chancellor froze the interest rate that ISMI payments were based on at 6.08 per cent until to December. Under the scheme, borrowers are able to claim the interest on monthly mortgage repayments for up to two years while looking for a new job.

The amount that homeowners can claim was previously calculated based on the base rate plus 1.58 per cent. However, in November it was fixed at 6.08 per cent until June, preventing claims from falling in line with the base rate. Today the Chancellor extended this for a further six months.

In the Pre-Budget Report the Chancellor also reduced the time that homeowners had to wait after losing their jobs before claiming under ISMI from 39 weeks to 13 weeks for a year. Homeowners were also able to claim on mortgages worth up to £200,000, increased from £100,000.

The Government is also extending the criteria for mortgage rescue, which is delivered by local authorities, so that households in negative equity cases are not automatically excluded.

Yesterday the Department for Communities and Local Government unveiled a separate scheme, called Homeowner Mortgage Support, which allows borrowers who have suffered a sudden drop in income to defer the interest on monthly mortgage payments for up to two years.