Northern Rock pays back BoE loans faster than expected

Northern Rock is paying back its loans to the Bank of England much more quickly than expected, new analysis shows, though the rapid repayment could mean extra pain for the mortgage market and the economy.

Northern Rock owed the Bank of England £24.1bn on 31 March, a reduction of £2.8bn in three months, helped by a sale of mortgages to JP Morgan for £2bn. However, the Bank's balance sheet shows that "other assets" – which include the Northern Rock loan – have fallen by £7.9bn since 2 April.

Simon Ward, chief economist at New Star Asset Management, calculates that declining foreign currency lending could have fallen by £4bn, leaving £3-4bn of the drop to repayments by Northern Rock. A fall of that size would put the bank close to its £20bn target for the end of the year already, though observers said that while repayment was ahead of schedule the rate was not as quick as the Bank of England figures implied.

Mr Ward said that though rapid repayment was good news for Northern Rock, it could add to the woes of the economy by taking more capacity out of the already depleted mortgage market.

"The Government may be constrained by EU state aid regulations but a less rapid reduction in Northern Rock's mortgage book would help to reduce the risk of a severe economic downturn," Mr Ward said.

The nationalised bank is said to have repaid the loans quicker than expected since then as mortgage customers have redeemed loans and moved elsewhere.

Ron Sandler, the bank's executive chairman, wants to roughly halve the size of Northern Rock's loan book to repay the Bank of England's loans before 2011. He has said that a sharp downturn in the housing market could threaten the timetable because the plan depends on other lenders taking Northern Rock's customers off its books.

Mr Sandler's plan will receive a boost next month when Lloyds TSB starts offering mortgages to Northern Rock customers that meet its standards.

A Bank of England spokesman said that the Bank's "other assets" also include loans to the UK Government, other central banks and international financial institutions, as well as Northern Rock.

Northern Rock declined to comment.