The Royal Bank of Scotland (RBS) has doubled the time guaranteed not to repossess the properties of customers who fall behind on payments from three months to at least six months.
The bank, which owns NatWest, is Britain's fifth largest mortgage lender with a 7% market share.
The government has bought a 58% stake in RBS as part of its recapitalisation plan for the banking sector.
The RBS announcement will put pressure on the biggest mortgage lender, HBOS, which has also taken taxpayer cash.
RBS also said it would make sure customers had the opportunity to seek independent advice before starting any legal action.
The news was welcomed by Citizens Advice and also the charity Crisis, which represent homeowners struggling with arrears.
Last week, Treasury minister Ian Pearson said he would hold all banks' "feet to the fire" to ensure customers were treated fairly.
Repossesion Housing Stock
"At a time when house prices are falling, banks don't really want to do repossessions because all they end up with is no money coming in from the mortgage loan and they end up with a stock of houses, which they probably can't sell," said Jonathan Charley from the consultants EDS.
"So, for most banks they'd rather avoid having repossessions and actually just get some form of money coming in from people."
