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What Will Happen To Northern Rock Mortgages?

Savers have camped overnight and queued round street corners to get their money out of Northern Rock, but how will the chaos in UK banking affect mortgage borrowers?

Northern Rock has been in the news for days now. It looked forward and saw potential problems with funding for mortgages after a lending crisis hit financial institutions the world over in August. The root cause of the US sub-prime lending collapse has led to a mis-trust between banks and their lending practices. Banks have themselves to blame for the way they have lent money, and the way they won’t come clean about having borrowed money. The inter-bank lending rate has gone up to 6.9% - 1.15% above the Bank of England base rate, and Northern Rock felt compelled to go to the Bank of England for assurance it would get emergency funding to assist with is mortgage orders.

Northern Rock has specifically had problems because it has concentrated on mortgage business in the recent past, becoming Britain’s fifth largest mortgage lender in the process. Rather than increase the number of savers it had the bank, which converted from a building society in 1997, sold on the debt.

The Financial Services Authority has described Northern Rock as ‘solvent, exceeds its regulatory capital, and has a good quality order book’, and said it would not have lent the money if Northern Rock was likely to fold. Indeed, the worst case scenario seems to be that it would be bought by another bank – or a combination of more than one.

Northern Rock’s lending habits have made it the most likely bank to be hit by the credit crunch, but it may not be the only one. The City feels that Bradford & Bingley, Alliance & Leicester and even the number one mortgage lender Halifax may be affected.

Any Northern Rock borrower on a fixed rate mortgage deal or variable rate deals such as trackers will not see their deal terms altered. Those on fixed rates will stay on that rate until the fixed period ends. Those on trackers will see their rate only move when the Bank of England base rate moves. It is possible – maybe even probable – that Northern Rock will raise its standard variable rate, though it has no said it will do so yet.

For those people on the Northern Rock mortgage waiting list, they will see their mortgage honoured. For anyone who has simply made an enquiry, nothing is signed so deals will undoubtedly change. Abbey, Bank of Scotland and Halifax have all increased mortgage rates in the last couple of weeks and Northern Rock will be considering doing the same for new customers.

If a mortgage lender were to go bankrupt, homeowners with loans from the bank or building society would still have to pay off their mortgage. The new owner of the bank or the receiver would consider the monthly payments on mortgages as assets and borrowers would be expected to continue to pay, or risk losing their home. Unless told otherwise a mortgage borrower would simply continue making their monthly payments as usual. Further down the line they would be told of a new recipient to whom to make the payments. There is no possibility of a free mortgage!

Tom Smith
11th September 2007

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