Mortgage shock hits Northern Rock profits
British lender Northern Rock is to increase its mortgage set-up fees after revealing today that cut-price fixed rate home loans would hit profits growth this year and in 2008.
Northern Rock is set to see net interest income impacted by up to £200m (€299m) following its failure to react quickly enough to the recent spate of interest rate hikes.
But the group said it will introduce home loans with steeper arrangement fees for borrowers to switch to after they come off their current two year and three year fixed rate deals, some of which are more than one percentage point lower than those on offer to new customers.
Northern Rock already has some of the highest arrangement fees on the market, according to personal finance website Moneyfacts.co.uk.
The group charges just under £2,000 (€2,990) on some of its two year fixed rate mortgages, which is more than double the industry average of around £800 (€1,196).
Northern Rock claimed that the move to introduce higher charges would make loans more affordable for borrowers, rather than help the bank recoup money lost.
By charging higher fees, it can lower the monthly interest rate and help limit the “payment shock” for customers coming off cheap fixed rates, according to the group.
Northern Rock added that borrowers will be given the choice of a range of different mortgages, including some with lower or no initial charges, offset by a higher monthly interest rate.
Customers can also add the set-up costs to their home loan.
Interest rates have risen five times since last August, hitting 5.75% earlier this month – the highest level since March 2001.
Lenders pass on most of the rises to borrowers in increasing their variable mortgage rates, but those on loans fixed before rates were hiked are protected from the increases until their deals come to an end.
Northern Rock admitted it failed to take early action to stem the losses suffered as a result of the bank base rate being upped in quick succession and said it will see profits growth impacted this year and in 2008.
Today’s half-year results showed little impact so far, however, at £346.6m (€518.4m), an increase of 26.6% on a year earlier.
Northern Rock said that it had upped its share of net mortgage lending to 18.9%, which is an all time high for the bank.
The Newcastle-based group also notched up a record for half-year gross lending, up 30.5% on the same period last year, at £19.3bn (€28.8bn).
Soaring house prices helped offset a slight lull in home buying activity as a result of the five interest rate hikes since last August, although the bank said house price growth would slow in the second half of the year, with the rate rises affecting consumer confidence.
Remortgaging levels at the lender had also risen as borrowers sought to protect themselves against further rate increases.
Northern Rock saw a slight increase in the number of borrowers behind with repayments, with arrears levels at 0.47% last month against 0.45% the previous summer as increases in the cost of borrowing stretched debt-laden consumers.
The number of properties repossessed almost doubled to 1,314 in the first six months of the year, from 662 at the end of 2006.
Citigroup analysts raised concerns over Northern Rock’s arrears levels, despite the lender’s assurances its credit quality was “robust”.
A Citigroup research note said the £57m (€85m) impairment charge set aside by the group in the first half of the year was 27% more than expected, suggesting that credit quality remained a “key risk”.
