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Northern Rock customers who took out controversial 125% loan are vulnerable to tax and interest rate rises
A quarter of Northern Rock's "bad bank" mortgages are in negative equity, leaving customers unable to shift their mortgages from the nationalised lender and vulnerable to rises in interest rates and taxes.
The admission about customers of the Together mortgage – which allowed customers to borrow 125% of the value of their home – was made by Richard Banks, chief executive of UK Asset Resolution (UKAR) the government-owned body that controls the "bad" part of Northern Rock and the nationalised mortgages of Bradford & Bingley.
Banks said that 107,000 of the 400,000 mortgages that UKAR had taken on through Northern Rock (Asset Management) (NRAM) – the so-called "bad" arm of the Newcastle-based lender – were in negative equity while 172,000 of the UKAR's total of 726,000 mortgages are in the same situation.
Banks said: "The current low level of the Bank of England base rate means that loan repayments remain affordable for most customers. However, increases in taxes, higher inflation and job losses will all put pressure on disposable incomes even before the cost of any future higher interest rates. Inevitably our customers will be affected by these changes and this may impact the performance of our business."
UKAR is already trying to help troubled customers stay in their homes: 44,000 customers were offered "mortgage arrangements and account modifications" to help with repayments. More than 1,000 of its 2,500 staff are involved in contacting customers facing repayment difficulties.
Banks, who was paid £552,011 including a £170,000 bonus last year, is working from a 10-year business plan even though the mortgage with the longest remaining life is not due for repayment until 2049. The main way the business will be able to repay the taxpayer's £22bn loan to NRAM and £25bn to B&B is through customers repaying their mortgages.
The taxpayer loan that was used to support Northern Rock during the run on the bank in September 2007 is now held inside UKAR, while a new Northern Rock was created which is in the process of being cleaned up for a return to a private sector.
Banks is also aiming to turn UKAR into a streamlined business that might be able to act as a type of back office for other banks. It might also be a way to make UKAR attractive to a potential buyer.
Both B&B and NRAM returned to profit in 2010. Combined, they earned a pretax profit of £1.48bn compared with a loss of £454m in 2009.
