State-owned bank Northern Rock is to increase the number of mortgages it lends, as part of the government's plans to kick-start the housing market.
The Treasury wants the troubled bank, which was nationalised February 2008, to loan around £5 billion in new mortgages this year, increasing to £9 billion in 2010, eventually taking its mortgage book to £14 billion by 2011.
These new mortgages will be granted by a new and separate mortgage business within Northern Rock. The Treasury says each mortgage will "be made on commercial terms to ensure value for money for taxpayers", allowing Northern Rock to return to the UK’s mortgage market with a wide product range.
It has also confirmed that it will start to lend up to 90% of a property's value, despite the climate of falling house prices putting people at risk of going into negative equity
. However, Northern Rock says 90% mortgages will be on available on a very limited scale. They are also unlikely to be offered to first-time buyers, the group which traditionally has had to resort to low-deposit loans.
The decision to step-up lending at marks a clear reversal from the motives for taking the troubled bank under state ownership in the first place. Following its £27 billion nationalisation, Northern Rock was ordered to reduce its mortgage business and start paying back the taxpayer.
Gary Hoffman, chief executive of Northern Rock, says new and existing customers of the bank will benefit from the plans.
He adds: “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."
Hoffman believes the move is an "important step" in the returning Northern Rock to financial health and, ultimately, the private sector.
The government’s U-turn is believed to be an attempt to kick-start the flagging mortgage market and get credit flowing again.
In 2008, house prices in the UK slumped by nearly 20%, prompting the lowest levels of mortgage lending seen in a decade. According to the Council of Mortgage Lenders, mortgage lending has fallen by 52% over the past 12 months, with just £12.4 billion lent during January. This is the lowest monthly total since April 2001.
It is hoped that increasing the amount of mortgages issued by Northern Rock will help more people - including first-time buyers - get on the property ladder.
However, it will be of little consolation to borrowers who came to an end of their Northern Rock deals within the last 12 months, with many forced to find another lender after Northern Rock rejected their business.
Last night, the Treasury made it clear it thought that the bank’s business plan to repay the taxpayer was "well ahead of schedule" with only £9 billion left of its £27 billion loan left to pay.
During 2008 Northern Rock issued just £3 billion of mortgages, as part of its plan to slim down its lending book. It also saw an increased number of borrowers missing payments; at the end the year, 2.92% of its total mortgage book was in arrears
of three months or more. This is up from 1.87% from the end of September 2008.
However, the 100% compensation guarantee offered to Northern Rock depositors attracted an increased number of savers. The bank reports savings balances increased from £10.5 billion at the start of 2008, to £19.6 billion at the end.
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.
“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.