Northern Rock suffers £585 million loss
Northern Rock has announced a loss of £585 million in the first half of the year as its cash-strapped borrowers struggle to meet their mortgage repayments.
The bank announced that the total number of its customers facing difficulty repaying their mortgage has risen sharply from last year. In June 2007 the figure stood at just 0.38% of its total mortgage book, compared with 1.18% today.
However, it is those borrowers that took out ‘Together’ mortgages of up to 125% loan-to-value (LTV) that are finding it tough. The bank reported an increase in arrears from 0.73% of these customers in June 2007 to 2.14%, which is estimated to represent around 3,700 homes. As house prices continue to plummet, many of these borrowers will already be in negative equity – owing more than their home is worth.
But in a further sign that borrowers with the bank are finding it tough, the number of homes being repossessed has also increased dramatically, up from 2,215 in June 2007 to 3,710 – which Northern Rock put down to a willingness to repossess when it became clear its customers were unable to make their mortgage repayments. Of these repossessions, a Northern Rock spokesperson confirmed that around 2,600 were 'Together' mortgage customers. In addition, the bank also announced it had increased the number of its debt management staff to 500 – from 185 last year.
Where next for Northern Rock borrowers?
The spectre of negative equity – not seen since the early 1990s - raises serious problems for borrowers coming to the end of their deals with the bank. “Unfortunately there are just no deals available at 100% LTV available anymore,” says David Hollingworth, a broker at London & Country. “Northern Rock borrowers who are coming to the end of their mortgage term will be faced with two issues – they may be able to move their mortgage elsewhere, or they will have to accept the higher standard variable rate repayments and tighten their belts.”
But it was not just Northern Rock that offered higher loan to value mortgages. According to Louise Cuming, head of mortgages at Moneysupermarket.com, other lenders that offered these mortgages included Alliance & Leicester, Birmingham Midshires, Abbey and Coventry Building Society.
“This raises the bigger question of just how many borrowers out there are facing negative equity?” she says. “And it’s not just those with 100% mortgages either. Those borrowers who took 95% or even 90% LTV may soon find themselves owing more than their home is worth, but so long as they can afford their repayments the problem of negative equity is only an issue when they come to sell.”
David Hollingworth urges customers facing difficulty to speak to their lender as soon as possible. “You may be able to switch to interest-only or extend the term,” he says. “But both of these options will work out more expensive in the long-run.”
For those borrowers tied in to a longer mortgage term, such as three or five years, Hollingworth believes they should pay off as much as possible. “If you can afford to, put all your energy into paying off the debt by taking advantage of the 10% overpayment you can make each year,” he says. “The more you pay off, the more attractive you will be to other lenders.”
Northern Rock ran into trouble last autumn as the credit crunch began to set in, as it was unable to borrow on the money market to fund its lending. As a result it was forced to go cap in hand to the Bank of England for an emergency loan, sparking the first run on a British bank for over 140 years.
The bank revealed that it has already managed to repay the Bank of England £9.4 billion, reducing the amount it owes to £17.5 billion. However, although Northern Rock’s executive chairman Ron Sandler has promised to repay the Bank of England in full by the end of 2010, the Bank of England has had to inject a further £3 billion into the bank to help shore up its balance sheet.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.