New hope for home loans as Rock revives

Could the nationalised bank's return to competitive lending help kickstart the credit market? Kate Hughes reports

The images of Northern Rock customers queuing round the block in September 2007, desperate to extract their money from the beleaguered bank, will stay with us for some time. The then fifth-largest mortgage lender in the country was saved from collapse by billions of pounds of emergency government funding – the prelude to what has become the worst recession in decades. But now it seems the Rock is making a comeback bid, dropping mortgage rates by as much as 1 per cent in two weeks.

The move seems to indicate an about-turn in the bank's aggressive policy of offering unattractive deals in a bid to force borrowers to switch to other lenders – so it could pay back its £26.9bn debt to the Government as quickly as possible.

According to research by broker Mform.co.uk, Northern Rock has slashed its fixed-rate deals on two-year offers for borrowers with a 40 per cent deposit, and five years with a 20 per cent deposit, to 4.19 and 6.69 per cent respectively. These rates are still some way off the most competitive deals, though. Mform suggests, based on a property value of £200,000, the state-owned bank's two-year offer is £1,664 more expensive than the best deal available, priced at 3.5 per cent, while its five-year deal is £9,166 more expensive than the market-leading 5.49 per cent.

Market Harborough building society is the most competitive for two-year fixed rates on remortgages, at 60 per cent loan-to-value (LTV), while Principality building society's five- year fix at 80 per cent LTV is the best bet over that term. First Direct's lifetime tracker at 75 per cent LTV and Norwich & Peterborough's standard variable rate at 90 per cent LTV are the most competitive over two years for first-time buyers.

The Rock has not yet returned to the market for two-year trackers, lifetime trackers or for first-time buyers since nationalisation.

But the news that the bank's rates may be thawing has prompted speculation that the Government is using its stake in the Rock to try to kickstart renewed competition in the mortgage market at the same time that Libor – the rate at which banks lend to each other – is dropping, making lending cheaper and easier for banks.

"It is good news for the mortgage sector that Northern Rock is back in business as it will increase the number of lenders," says Francis Ghiloni, business development director at Mform. "In the old days of a year ago, Northern Rock had 25 per cent of all lending, so its departure was a serious blow. But these deals aren't yet entirely good news for borrowers as its best deals are reasonably competitive but not that competitive.

"The Rock isn't on a roll yet, but the genuine good news for all borrowers and the market is that signs of normality are being detected."

Jemma Rundle, a spokeswoman for the Rock, says: "We've made no announcement on changes to new lending. Our business plan is under review and we are reacting to the market and our competitors, but there are no dramatic changes taking place right now."

Northern Rock had £11.5bn of debt outstanding on 30 September 2008, the last time it made the figures publicly available. This was down from an original debt of almost £27bn in early 2008. But the rate of repayment is expected to drop as the bank slows its mortgage redemption programme in light of the economic conditions.

This means the bank will be less active in encouraging customers to transfer their debts away. And crucially it aims to return to being a profit-making business by 2012. To do that, it will have to tempt in more customers by offering competitive deals, including improved mortgages.

As for the Rock's other products, its savings rates are set to challenge the best buys for some time, says Sean Gardner of price-comparison site MoneyExpert.com. "In general, its savings deals are above average," he notes. "They are improving and the Rock doesn't seem as keen to follow the downward trend we are witnessing elsewhere. I expect them to stay in the top quarter of the market for savings rates in a bid to revive the brand."

Northern Rock's best instant access savings account, for example, pays 2.9 per cent, against an average of just 1 per cent. Asda currently tops the table with a rate of 5.75 per cent. For 60- and 90-day notice accounts, the Rock offers 3.25 against an average of 1.5 per cent, and for cash ISAs it matches the average of 3.5 per cent but lags behind First Direct's 7 per cent a year.

However, any return to competitiveness and profitability in just a few years could rub salt in the wounds of some 150,000 Rock investors who lost all their investment – estimated to have been worth over £3 a share at the time – as a direct result of the Government's intervention. "The Northern Rock Compensation Scheme Act of 2008 currently offers nothing to shareholders," says John Reynolds of White & Case, the representative for one of the shareholder groups involved in legal action against the Government. "The scheme is based on assumptions which include the bank being in administration.

"If Northern Rock is in administration, that means it's worthless," he continues, "which leads to the inevitable conclusion that there is zero compensation for shareholders." This, he argues, breaches the European Convention on Human Rights when it comes to a government seizing private property without compensation.

The case, which went to trial in January, cannot result in the recovery of any money for shareholders, says Mr Reynolds, but he adds: "An order from the court can make the Government go away and think again about a solution that doesn't breach the convention on human rights.

"That the Government saved the bank doesn't mean it has a right to take something for nothing and then take all the profit later down the line." A judgment is expected in a few weeks.

While investors battle it out, the bank is in the process of awarding staff a 10 per cent bonus. "This company- wide scheme was openly announced last October," says Ms Rundle. "The incentive is directly linked to the schedule of repayments of the government loan, which we had aimed to pay 25 per cent of by the end of 2008 and have achieved significantly ahead of schedule."

But Vince Cable, the Liberal Democrat shadow Chancellor, is far from impressed with the decision. "This is bringing the worst of the City bonus culture into a public body," he says. "It is an extraordinary action from a state-owned bank which still owes billions to taxpayers. When millions of people are facing pay cuts or even unemployment, this is indefensible. The Government should step in now."

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