Between a Rock and a Hard Place - Hard times for Northern Rock borrowers

How apt the saying for many a Northern Rock borrower - coming to the end of a fixed rate deal and finding that the Standard Variable Rate (SVR) is uncomfortably high and in many cases that they have over extended themselves.

Suggestions as to what course of action might be open to borrowers in this position are at the end of this article.

So where did things go wrong for Northern Rock?

Quite simply, they ran out of money to lend. Northern Rock had been offering attractive products at decent rates to borrowers for many years and had proved a popular choice for thousands of borrowers.

Volumes of lending were high and Northern Rock depended on raising the funds for this lending on the world money markets.

Unfortunately, events across the Atlantic, the so called 'credit crunch', led to these funds drying up and Northern Rock found itself in a position where it could not satisfy its lending commitments.

This led to a lack of confidence and a run on the bank, the government stepped in to fully guarantee savings accounts and pumped in billions of pounds to tide the lender over until a longer term solution (a buyer) could be found.

No prospective buyers proved suitable and the bank was nationalised to safeguard the interests of savers, borrowers and the public funds.

Where does this leave the holders of Northern Rock mortgages?

Northern Rock now finds itself in a position where it needs to reduce its mortgage borrowings (to repay the public debt) or become more profitable from mortgages in existence.

The solution to this was to increase the SVR in the expectation that borrowers would switch their mortgages to an alternative lender or raise bigger profits from those that remain.

The problem is that many other lenders are suffering from restricted funds and have themselves raised the rates they charge or reduced the amounts that they are prepared to lend.

A high proportion of Northern Rock mortgages were sold on fixed rates, high loan to values or on their 'Together' product, combining a mortgage and an unsecured loan.

Fixed Rate Loans

When the initial period for the fixed rate comes to an end, a borrower will move to the SVR and will probably experience a sizeable increase in interest payments. A remortgage could be considered if equity in the property and income multiples permit.

High Loan to Value Loans

Where there is little or no equity in the property it may be difficult to remortgage away from the lender until market conditions allow the return of these products.

Together Mortgages

If the borrower were able to remortgage away from Northern Rock for the main loan but leaves the unsecured loan with the lender, the terms make provision for the interest rate on the unsecured lending to be raised to a punitive level. It would be more beneficial to refinance the total loan if it is possible.

In any of these examples, advice should be sought from a qualified mortgage broker who has access to all lenders in the marketplace and before you get into difficulty with repayments.

Nothing in this article is meant to constitute individual advice.

Readers will need to contact a mortgage adviser regulated by the Financial Services Authority to discuss their individual position.