Mortgage arrears rising, says Northern Rock

Nationalised bank Northern Rock said today that arrears had risen since the start of the year as mortgage borrowers struggled to pay higher rates caused by the credit crunch.

And the group warned that arrears levels could rise further amid an “uncertain” mortgage market. Northern has seen the percentage of mortgages three months in arrears rise to 0.95%, up from 0.57% at the end of December.

However, Northern’s executive chairman Ron Sandler gave an assurance that the overall quality of the group’s mortgage book was “satisfactory” and that he was making “solid progress” with plans for the Newcastle-based lender.

The firm was bailed out with public cash after a funding crisis last September - sparking the first UK bank run for more than 140 years – before being nationalised in February.

Mr Sandler said Northern’s shrinking loan book – being scaled back as part of the business plan – was also contributing to the hike in arrears, as the group’s greater risk borrowers found it increasingly difficult to source alternative funding with other lenders.

A key part of Northern’s plan has been to reduce its balance sheet to a sustainable level. It has sought to achieve this by assisting borrowers to transfer their mortgages to other lenders at the end of their fixed or discounted period.

Mr Sandler said tougher lending conditions in the UK mortgage industry had made this target more challenging, although he said plans were still on track.

“We have targeted redemption levels throughout the duration of the plan and are hitting these targets, which will allow us to repay the debt within the time frame set out,” he said.

Mr Sandler added that there was little cause for concern yet that it would miss future targets.

The bank is offering a limited range of new mortgage products, with gross residential mortgage lending in the first quarter of the year being a “modest” £1.2bn (€1.5bn).

Before Northern Rock’s troubles began last summer, the group saw lending levels of around £17bn (€21.5bn) in the first six months of 2007 alone.

Plans to rebuild its retail savings base after the run on the bank in September have also seen Northern add more than £2bn (€2.53bn) in deposits since the start of the year, in line with its plan to achieve a more balanced mix between retail and non-retail sources of funding.