State-owned Northern Rock is set to offer great deals for savers in the coming months, however it is the bank’s existing 800,000 mortgage customers who are the bone of contention.
The main cause of Northern Rock’s swift demise was the home loans offered by the bank, it has been suggested that the bank has too many mortgage holders which needs to be drastically reduced to turn the bank around and get it back to its former glory days.
Northern Rock will no longer be offering its Together Mortgage, a product which has got much negative criticism from the industry, the loan allowed 125% mortgage lending for home buyers. These types of loans are high risk, and at the current height of the credit crunch could be risky from lender’s point of views. It involves a 95% mortgage with a 30% unsecured loan offered on top of this mortgage loan, however any default on payments would be greatly detrimental to the lender.
A Northern Rock spokesman has highlighted that the bank will be conducting business as usual for its existing home loan customers, he said: "The government has confirmed that the company will remain fully open for business, working normal hours and operating as usual, and that customers will not be affected. All branches, call centres and other operations remain open for business."
However customers may hit problems when the tracker deals’s introductory offers or discounted rates they have on their loans come to an end. It is looking likely that the bank will not offer its customers another deal which is anywhere near as competitive as their original deal, this may encourage a number of customers to look to transfer their loans to other providers, which will help lenders, advisers and mortgage lead companies.
Director of Savills Private Finance, Melanie Bien, believes Northern Rock are hoping customers will transfer their debt to other providers. She said: "When you come to remortgage, Northern Rock will be keen to move the business to another lender, so any rate they choose to offer is likely to be uncompetitive."
For many of Northern Rock’s existing mortgage-holders it won’t be a problem for them to re-mortgage their property with another provider. However, customers who took out a Together home loan, borrowing up to 125% of the value of the property may have some trouble finding another lender to take on their debt. The 125% is no longer available from the majority of providers, and many have tightened their criteria as a result of the credit crunch.
Bien gave some advice to Northern Rock’s 200,000 Together mortgage holders, she said: "Your loan-to-value [your mortgage expressed as a percentage of your home's value] should have fallen during the time you have had the loan because house prices have risen, so you have more equity in the property.
"If you are coming to the end of a two-year deal, for example, your home will be worth more than you paid for it, so the LTV will have reduced. This may enable you to shop around for another lender offering a competitive rate of interest. If you can pay down the unsecured element, this will also help."
The Together loan customers also need to consider, they will probably not have build up much, if any, equity, and when the term of their original deal comes to an end, they will be switched to Northern Rock’s SVR product, which is one with the highest interest rates in the market at 7.59%.
Some think that Northern Rock is the last place they want to have their loans with, but on the plus side, every move is being closely scrutinised and any questionable practices will not occur.
