Northern Rock, the nationalised mortgage lender, is sweetening deals for its existing customers who remortgage in a sharp about turn from past policy.

The Sunday Times revealed this week that Northern Rock has begun offering mortgages to existing customers again - for the first time since the bank fell under government control in 2007.

Loans given to existing customers in recent weeks have been as much as 0.30 percentage points cheaper than the deals for new borrowers.

A two-year fix is currently 10 points less for existing borrowers at 4.09 per cent, compared with 4.19 per cent for new customers. On five-year fixed rate deals - among the most popular mortgages for those looking to fix - Northern Rock is offering 4.99 per cent to existing borrowers while new customers pay 5.29 per cent.

Both five-year deals have a £995 fee. The deal for existing customers works out £1,560 cheaper over the mortgage term for a customer with a £150,000 repayment mortgage.

So far, Northern Rock has only leant to those who have at least 25 per cent equity in their home and satisfy “strict affordability criteria”. However, a spokeswoman said the bank was considering extending the scheme to customers who need to borrow as much as 90 per cent of the value of their property.

Mortgage experts said the move would help improve the quality of Northern Rock’s loan book ahead of an expected sale, as existing customers do not have to undergo a new valuation of their property when signing up to a new deal.

In the wake of the government's takeover the bank stopped offering loans to existing borrowers - including good credit risk borrowers with mortgages that comprised a small proportion of their property value.

Customers who could not get another loan were forced to stay on Northern Rock's expensive standard variable rate (SVR) of 4.79 per cent - well above the industry average SVR of 4.61 per cent. As a result, many "good" customers switched lenders, leaving Northern Rock's loan book stuffed with mortgages at higher loan-to-values (LTV)

The company said in its annual report and accounts that the average LTV of its mortgage book had risen from 60 per cent to 73 per cent in 2008.

Ray Boulger, of John Charcol, the independent broker, said: "This shift in strategy is clearly a move to bring down the average LTV of Northern Rock's mortgage book. However, the bank's mainstream range is already better than most of the competition so they could have offered the same rates at higher profit margins. I find it odd that they have sought to undercut most of the competition in this way."

He added: "Offering better rates adds incentive to Northern Rock customers to stay with the lender rather than applying elsewhere."

Despite the policy shift, Northern Rock’s website still tells customers who are coming to the end of their deal to go elsewhere. It reads: “We are unable to offer you a competitive deal at this time. If you have an existing relationship with a mortgage or Independent Financial Advisor, we suggest you contact them to help you find the best deal available to suit your monthly budget.".

Northern Rock at one stage began sending customers to Cheltenham & Gloucester, the mortgages arm of Lloyds Banking Group, although the arrangement ended in April.

* Mortgage brokers are predicting a “significant” pick up in business during the third quarter of the year, according to mortgage lender Paragon. The buy-to-let specialists said a survey of brokers found 58 per cent expected to arrange more mortgages during the coming three months than they did in the second quarter.

John Heron, managing director of Paragon Mortgages, said: “We are starting to see concrete signs of confidence returning to the mortgage market and that can only be a positive for the UK housing market."

However, he added that mortgage availability was still relatively scarce and only borrowers with high deposits were able to secure the most attractive rates.