Northern Rock debt repayment to be hit by mortgage crisis

Northern Rock is ahead of schedule on repaying its loan to the government, but predicts harder times in the coming year.

However, the nationalised bank still hopes to be making a profit before the London Olympics.

Northern Rock's trading statement for the third quarter shows it has paid off £15.4 billion of the government loan – by encouraging mortgage customers to redeem and remortgage elsewhere and taking the cash – but it still owes £11.5 billion.

The bank admits paying back the loan at the same speed next year will be "more challenging in the future…. given the significant slowdown in the housing market and reduced availability of alternative mortgage financing".

Good news for the bank is that it has seen a run of customers trying to put cash into the savings accounts – spurred on by the 100 per cent guarantee provided by the government.

Total retail saver balances rose to £17.2 billion at the end of September 2008, an increase of £3.0 billion since the end of June.

However, Northern Rock has pledged to keep its savings at 1.5 per cent of the whole market – lest its government guarantee be seen as a competitive advantage. As such it has withdrawn some of its better accounts and put caps on new deposits.

New mortgage lending at Northern Rock stood at £2.4 billion since the beginning of the year – but the firm focusing on low risk customers with an average loan-to-value deal of 60 per cent.

However, the number of Northern Rock customers in arrears has grown. At the end of September 2008, residential arrears over three months were 1.87 per cent of all customers, compared with 1.18 per cent at the end of June 2008.

This is partly due to the fact better credit mortgage customers have been able to remortgage with other lenders, and those unable to switch – deemed as a high risk or with little or no equity behind them – have stayed on the Northern Rock mortgage book.

Ron Sandler, chairman of Northern Rock, said: "I am pleased with the progress Northern Rock is making.

"We have continued to repay the government loan well ahead of plan, our deposit base is growing, our restructuring programme has been completed successfully, and a new and stronger management team is now in place.

"These are encouraging developments. However, dislocated financial markets and falling house prices mean that the pace of progress achieved to date will be significantly more challenging to maintain going forward."


Northern Rock's board has also announced it is not to take legal action against its former executives.

A review by lawyers and accounts found there was insufficient grounds to proceed in any action regarding their role in the fall of the lender.