Troubled lender Northern Rock has set out plans to get its business back on its feet and phase out financial support by the government by cutting back on lending and slashing staff by one-third.

The bank, which was nationalised last month, warned that the proposals mean that it will be unable to offer new deals to some of its customers at the end of their existing ones as it refocused its business.

However, there could be a silver lining for savers: the strategy, submitted to HM Treasury today, would enable it to continue to offer eye-catching savings rates a spokesman said.

Britain’s fifth biggest mortgage lender also said it was planning to shrink its mortgage lending by about half. Such a substantial cut by a major lender would, under normal conditions, have been enough to cause widespread panic as analysts worried about funds for new borrowers drying up.

But experts said that conditions are far from normal. Northern Rock’s mortgage book has already shrunk dramatically so the latest announcement is unlikely to cause a market shock.

Ray Boulger at John Charcol, a broker, said: “The credit crunch and Northern Rock’s part in it means there is already a shortage of mortgage funds in the market. This isn’t going to make things worse.”

Since it ran into trouble last September, Northern Rock has, in effect, priced itself out of the mortgage market by hiking its rates to unattractive levels. It has also withdrawn the main features that made its deals attractive such as a "help with costs" option. As it seeks to shrink its mortgage business, it has therefore been writing to customers and suggesting they contact an independent financial adviser for help in choosing another lender.

It is also planning to cut back on other forms of borrowing, pulling out of unsecured lending altogether. Customers with personal loans will therefore have to go elsewhere when they come to the end of their term.

Northern Rock savers, though, should be able to continue to benefit from some extremely competitive deals, as the bank looks to reduce its reliance on financial markets to fund its mortgages.

About three-quarters of the money it lends to borrowers comes from the money markets while most other banks rely on savers’ deposits. This triggered the bank’s financial woes as lending in the money markets dried up last autumn.

To prevent a similar financial crisis in the future it wants at least half of its funds to come from savings. That means its savings rates will need to remain competitive to draw in new business.

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