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Northern Rock resumes lending

Northern Rock has been given the go-ahead by the Government to make £14bn of new mortgage lending available over the next two years. The move could provide an important stimulus to the housing market.

Northern Rock resumes lendingFocus on lending, not repaying

Initially after Northern Rock was nationalised, the bank was told by the Government to concentrate on repaying its rescue loan. The bank has now repaid £18bn to the Government, leaving the debt to the Exchequer at just £8.9bn.

But the Treasury now recognises that, with mortgage lending still badly constrained, increasing the supply of loans for house purchases has to be a priority.

Northern Rock is to increase its lending to first time buyers and for remortgages to existing customers. Borrowers will no longer be encouraged to source alternative mortgage arrangements when their lending term comes up for renewal.

Commercial terms

It is a policy described by the bank as "responsible lending that is competitively priced to deliver a commercial return". Northern Rock says its ability to re-enter the market for new lending reflects its success in delivering solid progress against the business plan agreed with the Government in March 2008, following its rescue.

Northern Rock's additional lending will be financed by an extra £3bn capital injection from the Government, which was previously agreed; from further finance loaned by the Government, with an extended repayment schedule; and from the bank's nearly £20bn of deposits.

Savings have doubled in the last year, as customers showed greater confidence in the bank. There is to be a legal and capital restructuring of Northern Rock to facilitate the change in direction, providing arrangements are approved by the European Union as conforming to state aid rules.

A return to the market

Northern Rock's chief executive Gary Hoffman says: "Since entering public ownership we have concentrated on reducing the balance sheet through a mortgage redemption programme and have therefore only written a limited amount of new lending. I am delighted that we can now return to the mortgage market in a more meaningful way, on a commercial basis."

In addition to Northern Rock's change in lending policy, RBS will also increase mortgage lending - the Government is providing an extra £13bn of capital to enable RBS to increase lending. Similar support is expected to be provided to the Lloyds Group, which now includes the largest mortgage lender, the Halifax.

The moves were welcomed by the Council of Mortgage Lenders, which stressed that Northern Rock had been a "significant" mortgage lender until the Government was forced to rescue it. Michael Coogan, director general of CML, says: "Mortgage redemptions funded nearly all the £18bn of the loan that Northern Rock repaid to the government. This was £18bn that had to be absorbed by the rest of the other mortgage lenders. By removing this market pressure, other lenders as well as Northern Rock should experience an increased capacity to lend to other borrowers."

90% mortgages are back

Ray Boulger of John Charcol brokers said the importance of the move came, in part, from the apparent willingness of Northern Rock to resume lending at 90% loan to value - a part of the market that has suffered badly from the credit squeeze.

"It certainly will make more lending at 90% more likely," says Boulger. At present, he points out, Northern Rock will only lend to a maximum of 85%. While RBS and the Lloyds Group are lending at 90%, the move by Northern Rock should spur them to price their 90% products more competitively and increase availability.

"It will be interesting to see what this does to the rest of the market," he says. "The extra competition in the market should bring rates down."

  • By Paul Gosling
    27 February 2009
While RBS and the Lloyds Group are lending at 90%, the move by Northern Rock should spur them to price their 90% products more competitively and increase availability.