Mortgage clinic: 'Will the Northern Rock nightmare hit my bank?'

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The Independent Online

'I was on the point of making the big move and embarking on my first mortgage. But after the Northern Rock debacle, I have lost confidence. How can I be sure this won't happen to another lender?'

CM, by email

The spectacle of a "run on the bank" is bound to undermine confidence, and there are no guarantees against another Northern Rock happening. But most of the people queuing outside Northern Rock branches were savers.

Borrowers are in a different situation. A bank's loans, including mortgages, are an asset. If a bank did fail, its liquidators would look to sell its lending business as a going concern. If that failed, they would sell parts of its "mortgage book" to other banks or building societies.

"Home-owners might worry about getting a letter from their lender asking for their money back, but this won't happen," says James Cotton, mortgage specialist at London & Country Mortgages. "A lender can only do that if the borrower doesn't keep to their terms. The loan agreement sets out what both sides have to do."

So even if your bank did fail and your mortgage was transferred, the new lender would have to keep to the terms you originally signed.

For example, if you took out a fixed-rate mortgage, the new lender would not be able to increase your interest during the fixed-rate period – even if their existing customers paid a higher rate than you. Nor would they be able to change capped rates or base-rate trackers, or change details such as redemption penalties.

But there are two ways that you could be affected. The first is if you have a variable-rate mortgage. If you are paying the standard variable rate (SVR), or have a tracker mortgage that is linked to the lender's SVR rather than the Bank of England base rate, the lender could switch your mortgage to its rate.

That could work in your favour, however: borrowers with the Portman saw their rates fall when Nationwide took over the building society, because Nationwide had a lower standard variable rate than the Portman.

The other way you could be affected is by the new bank's lending rules. If the lender that takes over your mortgage takes a stricter view on income, or certain types of property, you might not qualify for a new mortgage with them. But this will only affect you if you change mortgages, for example at the end of a fixed rate.

"As long as you continue to pay your mortgage there is little risk," Cotton says.

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