Northern Rock Borrowers Rescued?

Is there hope in sight for Northern Rock's beleaguered borrowers? A new deal from Lloyds TSB appears to be the answer to their prayers...

Since Northern Rock began to unravel last September, it has been involved in a seemingly endless swirl of controversy.

Its meltdown caused the first run on a British bank in over a century; it was notoriously nationalised this February and it plans to lay off around 2,000 staff -- a third of its workforce -- by 2011.

What's more, in a bid to repay the Government's £55bn loan, the Rock is attempting to rid itself of half its assets, by 'encouraging' its mortgage customers to move elsewhere.

As my Foolish colleague Donna Werbner reported last month, the way Northern Rock is trying to achieve this has raised criticism.

By offering deliberately uncompetitive rates on new mortgage deals and jacking up its Standard Variable Rate high above the industry average, Northern Rock hopes to `encourage' customers to take their business elsewhere when their fixed rate deals end.

Up until today, the question of whether the 180,000 borrowers coming off its fixed-rate deals over the next three years could find an alternative mortgage wasn't something the Rock seemed especially interested in.

However, a new deal could see Lloyds TSB ride to the rescue of Northern Rock borrowers.

Lovely, Lovely Lloyds...

While the Rock is happy to dump its borrowers, it seems that Lloyds TSB still finds them attractive enough to woo.

The banks is offering an exclusive deal to borrowers coming to the end of their fixed-rate deals with Northern Rock during the next three years.

As customers' fixed-rate mortgages draw to a close, Northern Rock will contact them by letter with details of how to apply for fixed-rate mortgage deals available from Lloyds -- which will come with a far more competitive interest rates than the Rock's Standard Variable Rate (currently 7.49%).

Best of all, Lloyds will waive its usual £99 mortgage application fee, will `fast-track' the processing of applications from former Northern Rock customers, and will also offer free legal and valuation services.

A Mortgage Made In Heaven?

So far, so good. However, the deal does have a few drawbacks.

No hero is able to rescue every damsel in distress -- and, in this case, Lloyds doesn't really want to.

Well-known for its prudent approach to lending, Lloyds has made it clear that it does not intend to `dilute the quality' of its mortgage book. Therefore, the bank won't pick up borrowers who can't meet their stringent lending criteria.

As such, the deal between Lloyds and Northern Rock will only be available to borrowers with a minimum deposit of 20%.

In light of the fact that, in its heyday, Northern Rock was famed for supplying 100% and 125% mortgages (deals which were only pulled a few months ago), it's clear that the Rock's most beleaguered borrowers are unlikely to benefit from the Lloyds deal.

What's more, the bank stresses that no Northern Rock customer is guaranteed a Lloyds TSB mortgage.

Essentially, I think Lloyds TSB is cherry-picking the `best' customers that Northern Rock has left -- and doing so on its own terms, using its own credit and mortgage history checks.

Maybe that's not so heroic after all...

But Is It A Good Deal?

Nevertheless, the most important question is whether or not the mortgages on offer from Lloyds are competitive.

According to Lloyds, its core fixed-rate products will be available to Northern Rock customers as part of the deal.

So, here's how they stack up in comparison with current market-leading fixed-rate deals for three and five years.

At first glance, Lloyds TSB's five year fixed-rate deal might not seem like the best option for those who have a deposit of at least 40% -- Abbey's rate is 0.2% cheaper, although it does carry a higher fee.

Similarly, with the First Direct deal -- which seems pretty similar to the Lloyd's deal on the surface --customers may be liable to pay a valuation charge in addition to the £598 fee. This could mean that, in effect, there's little to choose between it and the deal from Lloyds.

On the other hand, Lloyds TSB's three-year deal is trumped quite convincingly by Norwich & Peterborough's three year deal, as this has both a lower rate and a smaller fee. 

This just goes to show that any Northern Rock customers invited to apply for Lloyds TSB mortgages should think carefully before taking the lender up on its seductive offer.

Our Hero?

In the end, although the deal between Northern Rock and Lloyds TSB could provide welcome relief for some mortgage customers, it won't be the answer to everyone's prayers.

When it comes to mortgages, it's never a good idea to be swept off your feet -- but there is a lot to be said for `saving' yourself!

By checking the whole market and finding the best mortgage for you, you could avoid spending thousands more than you need to during the course of your deal...

Now that's the kind of heroism I like.

> Why not use an independent mortgage broker like The Motley Fool Mortgage Service to search the market for your perfect deal?