Don't bank on us Northern Rock advises customers

Published on Tuesday 19 February 2008 21:09

NORTHERN Rock is advising hundreds of thousands of its mortgage customers to take their business elsewhere, as it tries to secure its future by encouraging savers rather than borrowers.

The Scotsman has learned the bank is taking the highly unusual step of telling mortgage holders it is "unable to offer a competitive deal" when their fixed-rate period expires. It is even offering to help them find another loan company in an attempt to reduce its lendings.

The move emerged as the government faced a backlash from opposition parties and a revolt from the finance industry over its plans to nationalise the bank after attempts to find a private buyer failed.

Northern Rock, Britain's fifth-largest mortgage lender, has borrowed 25 billion from the Bank of England since it nearly collapsed during last September's credit crisis, sparking the first run on deposits at a British bank for some 140 years.

David Cameron, the Conservative leader, urged the Prime Minister to sack Alistair Darling, the Chancellor, over the fiasco – an embarrassment that deepened when it became known that Ron Sandler, the bank's new government-appointed executive chairman, is a non-domiciled taxpayer.

Vince Cable, the Liberal Democrats' Treasury spokesman, said the government was finding "banana skins to fall on".

Meanwhile, the British Bankers' Association (BBA) expressed concern that Northern Rock could have a competitive advantage after its nationalisation. The group, which includes the major high-street banks, has written to the Chancellor warning that fair competition would be required to prevent the government falling foul of European Union state-aid rules.

Northern Rock has more than 800,000 mortgage customers in Britain, of whom a spokesman said the "vast majority" were on fixed-rate deals lasting between two and 15 years. It is writing to customers when their fixed-rate deals are due to expire, telling them to "act now to avoid paying more than you need".

The extraordinary letter says: "We are unable to offer you a competitive deal at this time, therefore we suggest you contact an independent financial adviser who will be able to help you find the best deal available to suit your monthly budget.

"In the meantime, if you would like any help to find a new mortgage lender, or would like to obtain a redemption statement, you can contact us."

Experts said Northern Rock had recently changed its prices, making its mortgages less competitive – typically offering 6.49 per cent for a two-year fixed-term deal, rather than the market-leading 5 per cent. But it is also offering one of the best savings rates in the country, including a one-year fixed-rate ISA which pays 6.2 per cent.

Darren Cook, of finance website Moneyfacts, said: "We witnessed Northern Rock reprice their product range to an uncompetitive market position earlier this month. This was clearly an attempt by them to 'turn off the tap' of new introduced mortgage business.

"This letter shows that Northern Rock have abandoned their mortgage-retention policy in favour of genuine transparency to the existing customers, declaring that they can't offer their customers a competitive mortgage deal. No doubt, Northern Rock is only at the beginning of a difficult road ahead, and I think this is possibly a prudent step forward to reduce pressures on their existing infrastructure, so that focus can be maintained on the demands ahead."

A spokeswoman for the BBA said the letter was "highly unusual", but a sensible short-term move to improve the bank's position. "We will have to wait until the bank's longer-term business plan is published later this week before deciding whether this is the right strategy," she said.

A spokesman for Northern Rock said it was not driving customers away but being honest about its rates. He said: "Since September, we have been reining back on mortgages in order to shrink the mortgage book. We continue to offer savings products which we believe are very competitive."

The search for a solution to the bank's woes began after a run on the bank last year.

In August, Sir Callum McCarthy, chairman of the Financial Services Authority, wrote to Mr Darling indicating Northern Rock "was running into quite substantial problems" because of a slowdown in the availability of credit on global markets.

The news sparked a run on the bank, with customers queuing to withdraw their cash. Northern Rock sought emergency funding from the Bank of England in its capacity as "lender of last resort", and its share price plummeted by more than 31 per cent in one day. The government then announced it was guaranteeing 100 per cent of individuals' bank and building society savings up to 35,000.

In October, Sir Richard Branson's Virgin Group confirmed its interest in a potential rescue, but by last weekend the government had still not found a private deal which, in its view, offered good value for taxpayers.

Shares in Northern Rock – valued at 12.50 each a year ago – are now "virtually worthless". The shares had slumped to only 90p before trading was suspended last week.

There are 1,800 Northern Rock shareholders, many of them current and former employees – with holdings representing a large part of their savings. Mr Darling has made it clear that shareholders could expect very little, if anything, for their stock. "The reason for that is quite simple: if we had not intervened last September this bank would have gone under; it would have gone bankrupt," he said.