Details of the proposals will be revealed by the Chancellor on 25 November.
A total of five prisons are scheduled to be built by 2020, with cash for the £3bn building programme being generated through closing Victorian jails in city centre locations and selling the sites for new housing.
Approximately 3,000 new homes will be built on the former prison-land.
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It is understood each new prison will cost between £270m and £320m, with approximately 10,000 new inmates being moved to the new facilities.
The first site to be sold is the Grade II-listed HMP Reading, which was closed in 2013.
Around £80m per year will be saved due to the reduced costs of the modern facilities.
Chancellor George Osborne said: "This spending review is about reform as much as it is about making savings.
"One important step will be to modernise the prison estate. So many of our jails are relics from Victorian times on prime real estate in our inner cities.
"So we are going to reform the infrastructure of our prison system, building new institutions which are modern, suitable and rehabilitative. And we will close old, outdated prisons in city centres, and sell the sites to build thousands of much-needed new homes.
"This will save money, reform an outdated public service and create opportunity by boosting construction jobs and offering more people homes to buy."
(LM/CD)
