Rock split to increase competition

A deal struck this week to break up Northern Rock, the nationalised mortgage lender, should bring a much needed boost to the mortgage market – but may leave existing customers langiushing on poor rates.

Northern Rock is to be split into a “good” and a “bad” bank, with the good half eventually sold off to a private buyer.

The “good” bank will hold all of Northern Rock’s retail deposits and some of its lower-risk mortgage loans. Other borrowers will be placed into a separate asset company – the “bad” bank – that will remain under UK government control.

Mortgage brokers warned that this could be bad news for existing borrowers, as the “bad” bank is not expected to offer competitive rates.

“There is a risk that the standard variable rate (SVR) may become uncompetitive, so those who can’t easily remortgage will be stuck with the bad bank,” warned Ray Boulger at John Charcol, the broker.

Savers with Northern Rock will lose their 100 per cent deposit guarantee when the “good” bank is sold, making it a less attractive proposition to some savers.

But the restructure could force Northern Rock to offer more competitive rates. “I think it may bring them back into play in the savings market,” said Kevin Mountford at Moneysupermarket.com. “The bottom line is increased competition for savers.”

And the presence of another active lender in the mortgage market should eventually be good news for consumers. Northern Rock has already offered new competitive rates to borrowers in the past few weeks, which is pushing others to lower their rates.

“It is having a positive impact on lending across the piste,” said Boulger.

The “good” bank of Northern Rock will not be able to compete freely for mortgages and savings business for at least two years. Its mortgage deals must not appear in a top three position in Moneyfacts’ comparison tables unless they offer loan-to-values above 80 per cent or are aimed at first-time buyers. There will be a cap on the overall size of its savings book of £20bn until the end of 2011 which will limit its ability to attract new depositors.

Earlier this week, the EU imposed similar restrictions on the amount of new business ING, the Dutch bank, can do – and it could take the same action against Lloyds Banking Group and Royal Bank of Scotland. These restrictions may lead to less attractive rates for borrowers and savers as other banks would have less competitive pressure.

Northern Rock’s 200,000 former shareholders are not expected to receive any benefit from the planned sale of the “good” part of the bank.

The UK Shareholders Association said there were no direct implications for compensation from this week’s news.

Investors are still awaiting news of any compensation from the government for the Rock’s nationalisation in spring 2008. Any possible payout would be based on the valuation of the bank at the nationalisation date.

The UKSA, along with hedge funds RAB Capital and SRM Global – former Rock shareholders – are bringing a legal challenge over the basis for valuing the nationalised bank.