The £50 billion government scheme will now run until January 2009.
Mortgage lenders have welcomed the Bank of England's decision to extend the Special Liquidity Scheme (SLS).
The £50 billion service, launched earlier this year, allows firms to swap some of their hard-to-value assets for safe government bonds. These can then be easily sold on, boosting banks' revenue.
SLS was initially rolled out due to the severe balance sheet concerns mortgage lenders were suffering from due to the credit crunch. The breakdown in trust between banks came with the onset of the financial crisis, which led to the firms becoming much more reluctant to extend credit to each other.
Consumers have felt the effects of this lending freeze, with mortgage firms withdrawing cheap deals from the market and refusing to lend to customers they see as risky. Accordingly, mortgage approvals have declined by as much as £50 billion.
It is thought that the recent bankruptcy of Lehman Brothers, along with the sharp falls on global equities markets and HBOS' takeover by Lloyds TSB, encouraged the Bank to extend SLS. The scheme will now be in effect until January 2009, at least.
Michael Coogan, director-general at the Council of Mortgage Lenders, said: "In making a clear announcement today, the Bank has shown a welcome flexibility to respond to difficult market conditions. Its action should help promote stability at a time of uncertainty, and we would urge the Bank to continue to show flexibility, given that market conditions will remain challenging next year."
