Northern Rock one year on...

The headlines over the past few days have been dominated by the possibility of Lloyds Banking Group being nationalised. But what’s happened to Northern Rock, the first bank that was taken under the Government’s control?

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It is exactly a year since the Newcastle-based bank was nationalised after becoming the first British casualty of the credit crunch.

The troubled former building society, which concentrated on the mortgage and savings markets, has been hitting the headlines again recently after its 180,000 private shareholders lost an appeal regarding the value of their shares at the time the bank was nationalised.

Northern Rock shares, which were trading at more than £12 this time two years ago, were suspended at 90p per share immediately before nationalisation and its former investors has argued that the Government had deliberately undervalued the bank.

Shareholders have been the biggest losers in the Northern Rock story, but how have savers and borrowers fared over the past 12 months?

Borrowers

Northern Rock effectively pulled out of the mortgage market last year. This had a significant impact on many existing customers who were coming to the end of their current mortgage deal. The bank wrote to them and said it couldn’t offer them a new deal: instead they were advised to remortgage with an alternative lender.

However, for thousands of Northern Rock borrowers this wasn’t possible. The bank had been one of the major lenders to have offered mortgages to those with little or no deposit. Its Together mortgage range was available for loans up to 125% of a property’s value (95% was secured against the property and the remainder was taken as an unsecured personal loan).

These products were extremely popular with first time buyers. However, falling house prices have left many stuck: they can’t switch to another lender because they don’t have enough equity in their homes (as a result of the credit crunch many mortgage deals are only available to those with deposits of 25% or more), which means their only option has been to stay with Northern Rock and pay its standard variable rate (SVR).

Northern Rock’s SVR is one of the highest among the country’s largest lenders. Despite the Government having urged lenders to pass on the recent interest rate cuts to mortgage customers, Northern Rock’s SVR has dropped by just 2.40%, compared with the Bank rate which has been slashed by 4.0% – quite ironic given that it is a state owned institution. Northern Rock has yet to respond to this month’s rate cut but its SVR is 5.09%. Lloyds TSB/Cheltenham & Gloucester’s by contrast, is just 3.0%.

However, as part of the Government’s latest bailout initiative unveiled last month, it was announced that Northern Rock would be reviewing its mortgage strategy and look to start lending again. It is offering a restricted range of two-five and 10 year fixed rate deals and while not market-leading some are fairly competitive.

For example, it has a two-year fix at 3.99% with a £995 arrangement fee that is available for loans up to 65% of the property’s value. HSBC has the market-leading two year fix however, at 2.99%. This has a £599 fee and is available for loans up to 60%.

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Savers

You’ll probably remember the images of people queuing for hours outside branches of Northern Rock back in September 2007. Panicked savers caused a run on the bank amid fears it was about to go bust. In a bid to restore calm and stop people from pulling their money out, the Government pledged to guarantee all money held in Northern Rock accounts. As a result, the bank attracted huge inflows from new customers.

That guarantee is still in place and as such Northern Rock customers benefit from greater protection than savers receive with most other institutions: UK savings providers registered with the Financial Services Authority are signed up to the Financial Services Compensation Scheme which guarantees the first £50,000 held with a single institution.

Kevin Mountford, head of banking at moneysupermarket.com, said: “The irony of the situation at Northern Rock is that out of mismanagement it has ended up at an advantage over its competitors because of the total guarantee it offers savers.”

That said, under the terms of the nationalisation, the amount Northern Rock can hold in savings is restricted – its market share of UK retail deposits must be no more than 1.5%. As a result it closed its savings accounts to new customers last autumn to stop inflows of new money.

It recently re-opened its doors to savers however, although its rates aren’t the best. Its highest paying account is a fixed rate bond at 3.25%. This looks quite competitive at the moment, given that Bank rate is 1.0%, but your money is locked away until March 2014. Interest rates could well start rising over the next five years so if you go for this deal, you may find yourself stuck on an uncompetitive rate.

ICICI Bank, on the other hand has a fixed rate bond which not only pays a higher rate – 3.9% – but it is only fixed for one year so you don’t have to lock your money away for as long.
 
Northern Rock’s E-Saver is paying 2.25%. This compares with the leading deals which are paying more than 3.0% – Citibank’s Flexible Saver Issue 4 has a rate of 3.56%, while Egg’s Savings account is paying 3.50%.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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