Northern Rock announced plans to halt the rapid winding down of its mortgage book yesterday, after it was given longer to pay back its £26bn loan to the Government as part of efforts to boost lending and the economy.
The move will allow more customers to stay with the Government-owned bank once they come to the end of their existing loan deals. Northern Rock, based in Newcastle, has been shrinking its mortgage book since it was nationalised at the start of last year.
For the past few months, as existing mortgage customers have neared the end of fixed-term deals, the bank has informed them it will not be able to offer them a remortgage. Although its best customers have been given the chance to remortgage with Lloyds TSB, many others were forced to switch to the bank's standard variable rate (SVR) because no other lender would take them on. Northern Rock's current SVR is 5.09 per cent – higher than most major high-street lenders.
Yesterday, the bank explained its decision to begin increasing lending to existing borrowers, saying: "A key objective of the company's original plan, previously announced in March 2008, was to repay its Government loan, primarily through a programme of accelerating mortgage redemptions.
"This has been achieved by actively encouraging existing customers to remortgage to other lenders when their fixed-rate product deal ends. This has been very effective and has enabled the company to reduce the Government loan well ahead of the business plan. Reflecting this, and in order to support Government policy to increase mortgage lending capacity in the market, the company confirms it is slowing down the rate of mortgage redemptions.
"This means that more mortgage customers will be able to stay with Northern Rock. A reduced level of redemptions will lead to Northern Rock repaying its loan to Government at a slower rate.
"There will be no impact on savings customers of Northern Rock as a result of this decision and all Government guarantees remain in place."
The Chancellor, Alistair Darling, said ministers had moved to prevent Northern Rock from "actively getting people off its books". He added: "We have decided it is not appropriate for Northern Rock to continue to shrink its activities. [It has] made substantial repayments to the Government and is ahead of its repayment schedule. It is right for [it] to maintain [its] lending in the housing market."
The Government also announced plans to introduce a new guarantee scheme for asset-backed securities yesterday, a strategy aimed at reviving the market for securitised mortgage books. Under the proposals, which are expected to come into force in April, the Government will provide full or partial guarantees to eligible asset-backed securities with a AAA rating. Details of the scheme are to be announced over the coming weeks.
The package of support for the mortgage industry was broadly welcomed, although the Liberal Democrats claimed some of the measures were long overdue.
Vince Cable, the party's Treasury spokesman, said: "The financial system is in a very different state from when the terms of the nationalisation of Northern Rock were agreed. The Liberal Democrats have been calling for several months for Northern Rock to concentrate on lending to solvent businesses and individuals."
The Building Societies Association also warned the Government against aggressively increasing lending at Northern Rock, and called on it to not exploit its competitive advantage.
In Brussels, meanwhile, the European Union said it would determine before Easter whether the Government's nationalisation of Northern Rock had met EU rules. If it rules against the Government, the bank could be forced to return the £55bn it received in loans and guarantees.Reuse content