Charcol: Uphill struggle ahead for Northern Rock

Thursday, 21 February 2008 12:00 AM

Troubled lender Northern Rock will face a challenging task returning to a position of strength due to the inherent weakness of its public ownership, according to mortgage advisers John Charcol.

After a prolonged courtship of private equity bids from Virgin and Olivant, the government took the decision to nationalise the bank on Sunday - with the legislation presently undergoing scrutiny in the House of Lords.

However, predictions for the future of the lender remain gloomy.

"Northern Rock's products are currently extremely uncompetitive, with rates, in some cases, more than 1.5 per cent higher than other lenders'," said Charcol's Katie Tucker.

"Tuesday's comment that products would continue not to be exceptionally competitive, hushed any speculation that a government-backed bank would have an unfair advantage over its commercial counterparts in the open market."

Ms Tucker also argued the bank needed to offer some low loan-to-value, prime mortgage products in order to attract some low-risk business.

Failing this, the bank could be left with its present book of shaky loans and little else.

"Without some positive action, Ron Sandler could be interpreted as heading up one of the most sensitively-scrutinised wind-down operations in financial history," said Ms Tucker.

Northern Rock's decision to continue to offer 125 per cent loan-to-value mortgages has also attracted controversy.

This week alone Coventry Godiva, Abbey and Alliance & Leicester have withdrawn such products - leaving only BM Solutions, Northern Rock, Mortgage Express and Scottish Widows lending over 100 per cent.

"Anyone with existing mortgages in excess of 100 per cent should overpay as much as possible now to reduce their loan-to-value to less than 100 per cent, as their chances of having a remortgage option when the time comes, is slim."

However, present borrowers should be largely unaffected.

"For current Northern Rock borrowers the nationalisation should not affect their monthly payments; if you have a fixed rate the payments won't change and if you are on a tracker, they are obliged to track the Bank of England bank rate regardless - so you are protected," explained Ms Tucker.

"Even if you are on a deal which is a discount from the standard variable rate, it is unlikely that Northern Rock would subject themselves to the negative press of not reducing their SVR in line with a Bank rate cut again."

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