Rate cuts at the bank we all own

Northern Rock is undercutting rivals, splitting in two and back on Branson's shopping list. What's going on?

It's all going on at Northern Rock this month. It's been chopping and changing its mortgage rates on a weekly basis, introducing some stellar deals.

And at the same time it has just been given permission to split into two banks (more of that later), plus rumours are rife that Richard Branson's Virgin Money is once again interested in acquiring the Rock.

So what's the story with the lender we all own a small part of?

A bit of background

The first high profile victim of the credit crunch, Northern Rock was nationalised back in February 2008, following unsuccessful takeover bids by an in-house team and Virgin.

The Government needed more assurances that the bank would be safe and give taxpayers value for money, and took the decision to take it into State control.

Northern Rock took on a massive Government loan to keep afloat and began a programme of quick repayment. It paid back the debt at super-speed over 2008, reducing the loan by a whopping £18bn to £8.9bn.

But the problem with repaying the loan this quickly was that it was getting a lot of the stick for the way it was handling existing clients, particularly those in arrears who were shown less tolerance than might be expected from a Government-owned lender in a recession.

Indeed NR's arrears figures were some of the highest in the market (4.5% on its high loan-to-value Together mortgage range), and it had a stock of 3,620 properties in possession at the end of 2008.

Its mortgage range was pretty uncompetitive too (for new and existing borrowers) as it ploughed its energies into repaying the taxpayer -- the bank's mortgage lending dropped from £29.5bn in 2007 to £2.9bn in 2008.

New deal

After a revision of the repayment strategy it was agreed by the Government that the Rock would slow down the rate of repayment in order to lend more -- it pledged to lend twice as much in the second half of this year (2.7bn) as it did in the first six months (1.3bn).

By June, Northern Rock's loan was back up to around £10bn in net borrowing (on course with the new revised plan).

And we are starting to see more competitive mortgages on offer with the lender returning to the aggressive pricing policy and pole position in the best buy tables it was long associated with pre-crunch.

Good bank, bad bank?

Northern Rock has also agreed to a plan that splits the business into two:

BankCo will be the so-called 'good bank' which will continue to lend, take and hold deposits and hold the cleaner parts of the existing mortgage book. The Government is expected to want to sell this half as soon as possible (preferably pre-election) to get in much-needed funds and restore public confidence.

AssetCo, dubbed the bad bank, will hold the rest of the mortgage book -- the 'toxic' stuff, including the controversial Granite securitisation programme, and will continue to be owned by the Government.

The company has applied to the European Commission for approval and was this week given permission to split, which will probably happen before the end of this year.

What about Virgin?

Rumours that Virgin would be interested in a potential takeover of Northern Rock (the good bank bit) were further fuelled when its finance arm Virgin Money recently applied to the FSA for a banking licence.

The company did note that it has long made its intention to move into mortgages and current accounts clear -- indeed the industry has been waiting for its return to the mortgage market for the last few years, following the sale of its stake in The One Account to RBS in 2001.

However, Virgin is reported have already held talks with ex-Northern Rock chairman Bryan Sanderson to become a non-executive director of the new bank.  

But it could face competition -- Tesco, which has also applied for a banking licence, has been mooted as a potential suitor in some reports too.

Watch this space...

What about the rate cuts?

At the same time that Northern Rock is back in the business pages for its structural goings on, it is also all over the personal finance sections for its improving product range.

And it's great to see a bit of much-needed competition return to the mortgage market, especially to rival direct-only providers First Direct and HSBC who have dominated the best buy tables for the last 18 months.

Both are known for their strict lending criteria and propensity to turn down a large proportion of applications, so the return of the Rock provides much needed choice (though Woolwich, NatWest and Abbey are also pulling their weight at the top of the tables).

Rock and roll!

Having consistently cut rates throughout October Northern Rock now offers a competitive and wide mortgage range.

Purchase customers benefit from vastly reduced product arrangement fees which have dropped this month from £995 to £595. There are also fee-free options for those who are willing to pay a slightly higher interest rate.

And Northern Rock's best deals are available up to 70% loan-to-value for those with a 30% deposit, unlike some lenders who still reserve their cheapest rates for those with 40% upfront.

In fact, the lender's two-year fixed rate at 3.65% is currently a market-leading deal with a fee of £595. Plus its 2-year tracker at 2.69% with a £595 fee is another best buy. And it doesn't stop there. The lender's five-year fixed rate at 4.99% with a £595 fee is yet another best of breed.

In other words it has undercut the market on some of the most popular mortgage types available, spanking the competition when you look at the whole package of rate, maximum loan-to-value and fee!

The lender also has a range of deals available up to 85% loan-to-value at decent rates for those who have a smaller deposit, although unfortunately that's as high as it goes, with no mortgages for those with less than a 15% upfront. These higher-LTV products are competitive and worth a look, but they don't come with the 'best buy' tag.

It's also worth noting that Northern Rock products have really impressive flexible credentials. Not only do they allow overpayments like many big lenders, they also allow underpayments, payment holidays and the facility to borrow back overpayments, as well as calculating interest daily -- proper flexibility.

Frankly it's good to see the Rock back in the business of mortgage lending and, despite the fact that only a handful of its products really standout, most are attractive deals.

Increased competition is good for us as borrowers and increased business is good for us as taxpayers and 'owners' of the business. Though who the owner will be six months down the line is anyone's guess.

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