The deferrals will be available to customers of HBOS, Abbey, Nationwide, Lloyds TSB , Northern Rock, Barclays, Royal Bank of Scotland and HSBC, who between them account for about 70% of the market.
The interest on loans of up to £400,000 will roll up and then be added to the loan outstanding, to be repaid when circumstances improve. If the homeowner still defaults despite the extra help and was repossessed the government would pay the interest deferred.
The Chancellor said: "This is real help for homeowners at risk of repossession through no fault of their own. The scheme will give people who face a temporary fall in their income the confidence that they need to rearrange their finances so they can come through a difficult period without losing their home."
Housing Minister Margaret Beckett added: "We are determined to do everything possible to ensure that hard working households have the option to stay in their homes, if they suffer a loss of income during the downturn. This scheme will give households the breathing space to get back on their feet again and help ensure they do not face or fear repossession. It shares the risk of home ownership at this difficult time across all the partners - the Government, the lenders and the borrowers. We want to see all lenders signing up to this scheme as part of their efforts to ensure that repossession is always an absolute last resort."
Liberal Democrat Shadow Chancellor, Vince Cable responded: "We welcome the fact that the Government is now finally acting to head off large scale repossessions which devastate families, impose losses on the banks and create major re-housing problems for local councils.
"The Liberal Democrats have been calling for action for several months as the scale of this crisis has become clear. Some of our ideas are incorporated in this announcement.
"However, we must look at the small print. Last time the Government made an announcement on repossessions it only ended up helping 1 in 10 families.
"Ministers must explain who is eligible for this new scheme and how the Government will deal with the legal problems which have created the potential for repossessions to go ahead without recourse to the courts.
"There are also some very ruthless sub-prime lenders who do not seem to be buying into the Government's package.
"There is also the fear that the underwriting scheme will mean less money going to banks in the short-term, which could further reduce liquidity in the market."
