Q&A: What does Northern Rock’s promise to increase lending mean for you?

Northern Rock, the nationalised lender, said on Monday it will lend an additional £14bn over the next two years to help to kick-start the mortgage market. What does this mean for borrowers and savers?

What does this mean for the market?

It will go a long way to addressing the main problem for borrowers, which has been a severe lack of mortgage finance. The cost of mortgages has fallen dramatically in the past year but many borrowers have still been shut out as banks have not had the money to provide loans.

Melanie Bien at Savills Private Finance, the broker, says that given how little new lending has been done in recent months, an additional £5bn of funding this year will make a huge difference.

What new deals might Northern Rock launch?

Northern Rock is expected to offer more mortgages with higher loan-to-values. Alistair Darling told BBC Radio 4’s Today programme on Monday morning that the bank would be able to offer mortgages of up to 90 per cent of a property’s value. This would be a boost for first-time buyers, many of whom have been unable to obtain a mortgage as banks have demanded deposits of 25 per cent or more.

“[Northern Rock] can go up to 90 per cent but they will have to take that judgment on the individual circumstances,” said Darling.

He expected most new loans would require larger deposits, however, and made clear that Northern Rock would not return to offering 100 per cent of the property value.

“I have made it clear, and the prime minister made it clear at the weekend, that I really have severe doubts about the 100 per cent-plus loans that were made available. In this day and age, that is ridiculous,” he said.

Northern Rock is also likely to offer more competitive deals with lower loan-to-values. It has had some attractive rates in recent months but has had limited money to lend. The extra funding should mean that good deals can be made available for longer and to more borrowers.

Might this push other lenders to offer better rates?

Yes, it could do. Other lenders such as HSBC plan to offer a significant amount of new lending this year, so will want to ensure their rates remain competitive.

Brokers say other lenders have been signalling a return to the 90 per cent loan-to-value market but have not wanted to be inundated with applicants. If Northern Rock starts offering these deals, other lenders could be encouraged to follow suit.

What does it mean for savers? Will the rates change?

In order to lend out more, Northern Rock needs to attract more money from savers, and this means savings rates are likely to rise.

At the moment interest rates offered by the state-owned bank in easy access, cash Isas and notice savings accounts are distinctly average.

Savers can currently get 2.25 per cent on their money in an instant access account, and while this is certainly not the worst rate around it is significantly lower than the top rate of 3.5 per cent available from Scarborough Building Society. In tax efficient Isa accounts customers can earn 1.75 per cent, while savers in a 90 day notice account receive 3.2 per cent. However this is due to be cut by 1.25 per cent in early April and 0.75 per cent in early May, leaving savers earning just 1.2 per cent on their money.

Staying in the middle ground is unlikely to bring in many new savings customers, said Michelle Slade at Moneyfacts, so customers can expect interest payments to increase although the increases may be marginal.

Prior to nationalisation Northern Rock offered some highly competitive savings rates, particularly for the over 50s. But when the bank was nationalised it agreed to a set of competition principles that restricted it from competing on an unfair basis, and using public money to offer market leading products.

In 2008 the terms stated that none of the bank’s savings accounts could rank in the top three for the remainder of the year, and while this specific agreement has now ended, the bank is still required not to have a sustained presence as a market leader.

This means, say advisers, that while the bank is likely to raise interest payments on accounts to encourage savers, it will not offer the best rates in the market, and the increase will probably not have a significant effect on the rest of the savings market.

What about the level of protection on savings?

But many savers are still opting to put money into Northern Rock accounts regardless of the interest rates paid because of the level of protection offered. Money held in Northern Rock is still 100 per cent protected by the government. The bank says that if this guarantee is withdrawn and replaced by the Financial Services Compensation Scheme protection of £50,000, it will provide customers with at least three months notice first.