Since being nationalised almost a year ago, Northern Rock has had to adhere to a strict redemption policy as part of its agreement with the Government.

This was to prevent it from taking a bigger market share than was deemed fair, considering that it could have an advantage over competitors due to its nationalised status.

But in response to calls from the Government for banks to increase the amount they lend, Northern Rock has come to a new agreement with the Government which will see it take on a more relaxed policy, halving its mortgage redemption rate from 60 per cent to 30 per cent.

This means that Northern Rock will refinance more of its customers’ home loans when they come to the end of fixed rate deals instead of offering uncompetitive rates and encouraging them to seek a new deal from a different lender so that it could use the money to repay its loan to the Government; easier said than done in an economic climate where mortgage lenders have been drastically restricting their lending.

Those on a fixed rate mortgages suddenly found themselves unable to refinance their loan. It was especially difficult for those customers who took out Northern Rock’s Together mortgage which allowed homeowners to borrow up to 125 per cent of the property’s value and made it nearly impossible for them to secure a new loan at a time when even 100 per cent mortgages have become hard to come by.

The bank’s redemption policy has enabled it to repay its loan from the Treasury ahead of its business plan, so the cutting back of mortgage redemptions will mean that “more mortgage customers will the able to stay with Northern Rock”.

But, the pace at which it repays the loan will slow down, and the Government will have to lend the bank more taxpayers’ money so that it can afford to increase the amount it lends to customers.

Northern Rock has been working closely with the Government, it said, and will be given longer to repay the loan, which totalled nearly £30billion and was supposed to be repaid in full by the end of 2010. The bank has already managed to repay about £15billion through the accelerated redemption process.

The key objectives of the company have changed, it said in a statement, from repaying its debt to the taxpayer as quickly as possible, to supporting the Government’s initiative to boost lending and get the economy moving again.

“The Company will continue to work closely with the Government in reviewing its business plan,” Northern Rock said in the statement.

The Chancellor Alistair Darling said at a press conference yesterday that “We have decided it is not appropriate for Northern Rock to continue to shrink its activities, they have made substantial repayments to the government and is ahead of its repayment schedule.

“It is right for them to maintain their lending in the housing market.”

© Fair Investment Company Ltd