Under the terms of the £400m scheme housing associations and other providers can bid for low-cost loans to construct up to 10,000 homes across the country from 2015 to 2018, which will mainly consist of one and two bedroom apartments.
Landlords are obliged to offer below-market rental rates for at least seven years, while at the end of the period tenants have the choice to buy or move out of the property.
Eric Pickles, communities secretary, said: “This government is standing by people who work hard and do the right thing, and helping them move on and up in life.
“Both house building and the number of first-time buyers are now at their highest rate since 2007.
“But there is more to do. As part of our wider housing programme, this new scheme will help increase the provision of low-cost rented accommodation and provide a springboard for young people to upgrade to home ownership down the line.”
The housing association can choose to sell the Rent to Buy home after the period, or it can continue to let it out.
Boris Johnson, the mayor of London, said: “Through this pioneering scheme I’m challenging the capital’s developers to get building, and deliver the homes Londoners need, as fast as humanly possible.
“Loans are available to significantly accelerate the pace of development, especially on bigger schemes, and unlock additional supply.
“Through this exciting new fund we hope to provide thousands of brand new homes many years sooner than would otherwise be possible, and make them available to rent at below market rates for hardworking Londoners.”
But Matt Hutchinson, director of SpareRoom.co.uk, criticised the scheme.
He said: “In theory, the government’s rent to buy scheme is a good idea.
“The reality, however, is that even 10,000 homes won't scratch the surface of a chronic supply problem that is severely impacting renters hoping to get onto the property ladder - particularly in London.
“Like Help to Buy it simply doesn’t go far enough. Announcing a new policy to help first time buyers is a handy short-term win for the government, especially with an election looming, but we need to fix the housing crisis for everyone, not just a lucky few.
“The government needs to think bigger and reach more people. In a climate of short-term politics we need a government prepared to make tough decisions - the housing crisis could take a generation to fix.
“Doing more to encourage homeowners to rent out the estimated 15 million empty bedrooms in England alone would have a considerable impact on the supply of affordable rented accommodation for young people.”
Currently Help to Buy has helped 53,000 buy a home with a cheap deposit.
The Rent to Buy scheme is part of a £23bn affordable homes programme for 2015 to 2018.