Homeowners who are struggling to make their monthly mortgage repayments will be given the option of a two-year interest repayment holiday under plans announced by Gordon Brown this afternoon.

The prososals, which will come into force in the new year, could help hundreds of thousands of homeowners who are expected to fall into arrears over the coming months in the face of rising unemployment and a deepening recession.

The Prime Minister told MPs that the scheme is designed to support households that have seen an unexpected drop in income, for example because of a reduction in working hours or redundancy, allowing them to defer mortgage interest payments for up to two years. The interest will be added to the remaining mortgage.

If after two years the borrower is still unable to make repayments and their home is repossessed the Government will guarantee that lenders do not lose out financially.The initiative will cover mortgages worth up to £400,000.

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Gordon Brown told MPs that "hardworking households that experience a redundancy or significant loss of income as a result of the downturn will be able to defer a proportion of their interest payments for up to two years while they get their family finances back on track."

Lenders who have already signed up to the scheme include HBOS, whch owns Halifax and Bank of Scotland, Nationwide, Britain's biggest building society, Abbey, Lloyds TSB, Northern Rock, Barclays and HSBC. The lenders are responsible for 70 per cent of the home loans held in the UK.

The Council of Mortgage Lenders, an industry trade body said the announcement would reassure millions of borrowers that the Government is committed to helping borrowers who find they cannot make their mortgage repayments due to an unexpected change in circumstance.

Michael Coogan, of the CML, said: "The Government's recognition that it needs to offer increased support to help keep more people in their homes is welcome, and we will work with Ministers to make sure the suggested scheme will help in practice."

Repossessions are expected to soar to 75,000 next year, according to the Council of Mortgage Lenders, while 200,000 homeowners are expected to be at least three months in arrears by the end of 2008.

At the beginning of the week Royal Bank of Scotland said that it would not begin repossession proceedings until households were six months behind on their payments. The Prime Minister said Government-owned lenders Northern Rock and Bradford and Bingley were also committed to wait six months.

The move by the banks follows proposals in the Pre-Budget Report to introduce a three-month moratorium on repossession across the whole mortgage industry, offering homeowners at least three months protection from the threat of repossession.

The two-year scheme announced this afternoon builds on two existing Government initiatives, mortgage rescue and the income support for mortgage interest (ISMI) scheme. These are both designed to help only the poorest homeowners who have been made redundant or who can no longer afford to stay in their homes.

Peter Williams, of the Intermediary Mortgage Lenders Association, a trade body, said: “We very much welcome this initiative that government help will be made available to borrowers who would otherwise be facing a shortfall in their payments and ultimately repossession.”

“This is a good example of a creative solution being devised by government and the lending industry to mitigate the pain of borrowers in situations where all other avenues have been exhausted and the only alternative would be potentially losing their homes.”