Northern Rock launches 90% mortgage

The bailed-out bank once famous for 125% mortgages launches a 90% home loan.

From 2003 onwards, I began criticising the frankly bonkers lending policies used by some UK lenders, particularly the building societies turned banks.

Rocked to its core

For example, in October 2006, I slated Northern Rock’s risky ‘Together’ mortgage, which allowed a homebuyer to borrow up to 125% of a property’s value. With such a home loan, a property’s value would have to rise by a quarter just to match the outstanding loan.

Likewise, I attacked Bradford & Bingley’s ‘Max 130’ mortgage for offering to lend 30% more than a property’s value. Utter, utter madness!

Of course, we all know what happened to both of these banks!

When the credit crunch arrived in August 2007, it led to a run on the Rock the very next month. As a result of liquidity problems and rising losses on risky lending, Northern Rock was nationalised in February 2008, with Bradford & Bingley following suit in September 2008.

The Rock restarts 90% loans

In its three years as a taxpayer-owned business, Northern Rock has become a much more conservative lender. Initially, it halted lending in order to concentrate on attracting more cash deposits. Even so, it lost £140 million in the first half of 2010.

When the Rock eventually resumed mortgage lending, it offered fairly unattractive interest rates, while demanding bigger deposits (15% or more of a property’s value) for its best deals. Thus, these home loans were aimed at home-buyers with large deposits, or home-owners with plenty of equity in their existing homes.

Until this week, Northern Rock would not lend to anyone with a deposit below 15% of a property’s value. However, the Rock has now set its sights on the first-time buyer market, with the launch of its first 90% loan-to-value mortgage since it was bailed out by the British public.

A 10% deposit will enable borrowers to access three fixed rates from the Rock: 5.99% for two years; 6.49% for three years and 6.59% for five years. An early repayment penalty of 4% applies during the fixed-rate period, but there are no product fees.

That said, the Rock’s rates are not attractive when compared to Best Buy mortgages. For example, for borrowers with a 10% deposit, Newcastle BS offers a two-year fixed rate of 5.15%, as we revealed in More mortgages for smaller deposits.

Risky business

Although we’ve not yet seen a return to the cheap credit and lax lending criteria of the boom times, the UK housing market has been weak for many months. Indeed, it’s easy to imagine a further 10% drop in prices from here, which would wipe out the 10% equity demanded by Northern Rock for these new loans.

Furthermore, thanks to high house prices and tighter lending criteria, first-time buyers still find it hard to reach the first rung of the housing ladder. Indeed, without parental help, most young first-time buyers struggle to raise the £25,000 or so needed as a deposit in order to get the best interest rates. Hence, lending to these homebuyers really is riskier than sticking to the safe end of the market.

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Why now?

In my view, the Rock has jumped the gun a little by re-entering the market for 90% loans. Frankly, there’s no need for the Newcastle-based lender to take these risks, given that there are around 214 other 90% loan-to-value mortgages already available today (versus nearly 1,000 on offer before the bubble burst).

Then again, with the Rock following bailed-out banks Lloyds and RBS back into this market, this suggests that there are decent profits to be made from lending to first-time buyers. As taxpayers, we can only hope that these profits will more than offset the potential losses the Rock could run up when another housing downturn comes along!

In addition, the Rock’s decision to restart lending to borrowers with a 10% deposit was definitely done with one eye on its future return to private ownership. At some point, the government’s 100% shareholding in the Rock will have to be sold, perhaps to another bank or via a public flotation of shares.

Hence, riskier lending leads to bigger profits, thus securing a higher price when Northern Rock is eventually sold. This is probably the main reason for the return of the 90% loan at the Rock.

More: Bag a better mortgage | More mortgages for smaller deposits | The best mortgages are off the high street

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