Amid “challenging” times, Northern Rock has reported that during the last four months, since the Government took the bank into public ownership, there has been a 67 per cent increase in the number of mortgage borrowers going into arrears – this means they are three months or more behind on repayments.

Many people are unable to keep up with their repayments because, as part of its effort to scale down its business size, the bank is encouraging customers to go elsewhere by offering uncompetitive rates.

The bank’s management intends to repay its debt to the Bank of England by redeeming mortgages, but this relies on its customers being able to switch mortgage providers, and it is not going quite to plan because of the volume of borrowers unable to secure a mortgage deal with another lender.

A large portion of Northern Rock customers do not have sufficient creditworthiness or a large enough deposit to get a more competitive deal, and are therefore trapped on Northern Rock’s expensive deals – particularly hazardous for those who took out 125 per cent mortgages.

The nationalised bank has admitted that the creditworthiness of its customers is declining as borrowers who do have good credit histories and sizeable deposits are switching to more competitive loans elsewhere.

Ron Sandler, chairman of Northern Rock, has said that this increase in arrears is a result of a wider decline in market conditions, and that he did not believe that Northern Rock’s customers expect to receive preferential treatment because the bank has been nationalised.

He did concede that “the outlook for the UK mortgage industry remains highly uncertain.” but maintained that the bank was making “solid progress” with its business plan. As intended, its mortgage lending has shrunk dramatically to £1.2 billion of new loans in the first quarter of 2008, compared to a total of £29.5 billion last year.

The bank now owes the Bank of England £24.1 billion, down from £26.9 billion at the end of 2007; it intends to have repaid the loan in full by 2010, a plan which according to Mr Sandler still remains in place. Savings levels have also recovered to £12.8 billion, from £10.5 billion three months ago.

“The Bank of England loan facilities are reducing and the balance sheet is contracting as a result of planned mortgage redemptions.” Mr Sandler said. “While arrears have increased, the credit quality of the loan book remains satisfactory and at a level assumed in the plan.

“We remain firmly focused on our business priorities of repaying the Government debt, releasing the guarantee arrangements and, in due course, returning Northern Rock to private ownership.”

© Fair Investment Company Ltd