Taxpayers set to get back £38bn from ‘bad bank’

THE state-owned “bad bank” behind bailed-out lenders Bradford & Bingley and Northern Rock is on track to return its remaining £38.3 billion debt to taxpayers as low interest rates encourage borrowers to take their loans elsewhere.

Bradford & Bingley had to be bailed out by the 'bad bank'. Picture: PA

UK Asset Resolution (UKAR) also said yesterday that the booming housing market has driven more customers to switch their mortgages, but warned that higher borrowing costs could add further pressure to household finances.

The firm, created in 2010 to wind down the loan books of collapsed mortgage banks B&B and Northern Rock, has repaid £10.4bn to the UK government since it was formed, including £6.2bn in the 15 months to the end of March.

Chief executive Richard Banks said: “The board is looking to the future and continues to keep under review options for accelerating the repayment of government debt and realising value from the operational expertise that has been developed. A lot of good work has been achieved to date and we expect to repay the remaining £38.3bn debt in full.”

Banks said UKAR’s operating costs have dropped by almost a third since it was established, while the number of mortgage accounts that are three months or more in arrears has fallen 39 per cent to 15,483 since the end of 2012.

He added: “It is pleasing to see the significant reduction in arrears due to the dedication and professionalism of colleagues proactively working with our customers to help them achieve the right outcomes.”

UKAR has written to 31,000 customers with interest-only mortgages that are due to end in ten years or less, to make sure they have plans in place to repay their loans.

Although the improving housing market and economic outlook are helping customers to reduce the size of their outstanding loans and enabling them to remortgage with other lenders, Banks warned that higher rates could put borrowers under more strain.

He said: “We anticipate that if there was an interest rate rise of 1 per cent, another 22,000 customers could go into arrears. Small and often over a long period would be better than sudden, very large increases.”

The Bank of England’s monetary policy committee is widely expected to announce tomorrow that it has kept the base rate at its record low of 0.5 per cent, but economists believe borrowing costs could start rising early next year.

Howard Archer, chief UK economist at IHS Global Insight, said: “We expect interest rates to rise only gradually to reach 1.25 per cent by the end of 2015 and 2 per cent by the end of 2016.

“This reflects the Bank of England’s stated need to be cautious in raising interest rates. A relatively strong pound and likely relatively muted inflation should facilitate the Bank of England only raising interest rates gradually.”

Banks, a former group risk director at Alliance & Leicester, said: “House prices have increased faster than expected over the past 15 months, which, combined with continued low rates of interest, is good news for our customers and has driven increased redemption activity. However, many households continue to be under financial pressure. This, together with the prospect of interest rate rises and higher mortgage payments, will be a concern for many of our customers.”