You're better off ignoring Northern Rock

The State-owner lender has just unveiled a new range of mortgages - but don't expect to see any market-leaders

It doesn’t feel like nearly two and half years since Northern Rock was nationalised to save it from going under. Remember the queues of savers desperate to get their funds out of the bank and under their mattresses?

But what’s happened since? And, as a publicly-owned institution, is the Rock offering good enough mortgages to its owners, British taxpayers?

Repayment strategy

In the first year or so following nationalisation Northern Rock did a very good job of paying back a large chunk of its Government loan. Some would argue too good.

It repaid a whopping £18bn by February 2009, well ahead of schedule, but came in for some criticism over not always being lenient enough with struggling borrowers -- not a great image for a State-owned lender during a recession.

The policy changed a year down the line as Northern Rock began to slow down its loan repayments and focused on new lending again, albeit with a more constrained product range -- no return to the infamous 125% mortgage!

The lender pledged to lend £14bn over the following two years with competitively priced mortgages. It also announced plans to restructure the company, which was seen through at the start of this year.

In January 2010 the bank split into two --a new mortgages and savings bank called Northern Rock plc, known in the industry as ‘the good bank’. It holds savings balances of £19bn and £10bn of residential mortgages, as well as offering new products.

Other parts of the business, including some of the more fruity loans, became part of Northern Rock Asset Management, otherwise known as ‘the bad bank’ and also still under public ownership.

So what’s on offer now from ‘the good bank’?

Rock and a hard place

Northern Rock still has a balancing act to perform in terms of its mortgage lending.

Over-generous lending contributed to its downfall and it was publicly castigated for its lax criteria -- flogging cheap mortgages to those without a deposit.

On the other hand, doesn’t a State-owned lender have a responsibility to help struggling buyers onto the ladder with less restrictive criteria?

While it has made its £14bn lending pledge, Northern Rock certainly doesn’t want to be a lender of last resort for those who can’t get a deal elsewhere.

It also has to be wary that its publicly-owned status cannot adversely affect its competition. Last year the Government faced complaints that State-backed provider National Savings & Investments was offering ‘too high’ savings rates that were dislocating the market, at a time when competitors were desperate to attract deposits.

Therefore it’s no surprise that Northern Rock has gone for a cautious approach with products that have not exactly rocketed to the top of the best buy tables like they used to. However things have shifted a little this year with the lender reducing its mortgage rates eight times already.

The Rock’s mortgages

The first thing to note is that Northern Rock has a vast array of products, for first-time buyers, remortgagors and home movers.

They are all targeted at borrowers with either a decent deposit or significant equity. Unless you have 15% upfront you won’t be eligible for any of the mortgages, and many require at least 25%. This couldn’t be more different to the Northern Rock of old, but to be fair, it’s completely in line with the wider market.

Its fees also reflect the market average at £995, aside from a few fee-free options with a correspondingly higher rate.

But are the rates any good?

The short answer is that they are generally decent, some are really competitive but not market-leading, while others are pretty pricey -- a mixed bag.

Below I have listed some of Northern Rock’s best rates alongside the equivalent deals from other lenders:

Two-year fixes

Northern Rock’s cheapest rate is 3.29% with a £995 fee, available up to 70% LTV to first-time buyers, remortgagors and home movers.

It can be roundly beaten, with a handful of deals now available at sub-3% -- the leading rate being 2.69% from HSBC, but you’d need 40% equity for that and the fee is a hefty £1,499.

Yorkshire Building Society offers 2.89% for those with just 25% upfront, with a high £1,495 fee. But its 2.99% deal, also up to 75% loan-to-value has a fee of just £495, so beats the Rock on all counts.

Last week Northern Rock made significant reductions to its higher LTV two-year fixes. It has a 4.35% rate up to 80% and a 4.89% deal up to 85%, both with a £995 fee.

But, again, both can be easily beaten on the wider market. Furness Building Society has a 3.49% 2-year fix, up to 80% LTV (£999 fee). And up to 85% LTV Market Harborough Building Society has a 3.95% deal with a £995 fee.

Five-year fixed rates

The five-year fixed rate arena is very competitive right now, as I explained in Take Five and forget about your mortgage this week.

Northern Rock’s best five-year fix is a 4.99% rate with a £995 fee, available up to 70% LTV to first-time buyers, remortgagors and home movers.

But this week YBS launched a brand new deal at just 3.99%, up to 75% LTV with a £995 fee. Frankly, it knocks the Northern Rock deal -- and all others -- out of the water.

What about trackers?

Movers and first-time buyers can take a two-year tracker with Northern Rock at 2.59% (Base plus 2.09) up to 70% LTV with a £995 fee, while for remortgagors the rate increases to 2.75% (Base + 2.25).

The purchase deal is actually very competitive, but it can still be beaten by the market leaders, as the table below shows:

In general Northern Rock does have a broad range of decent products, some of which are competitively priced, others less so.

Whether it should be offering better deals to help borrowers is a matter of opinion. I think it would be hugely criticised for such an approach, not only because it would make life harder for its competitors (which are not publicly owned) but also, given its past, it simply has to lend prudently. I can’t see it rocking the best buy tables any time soon.

More: Fix your mortgage at 2.69%! | House prices fall for third month in a row