What Is Going On With Northern Rock

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What Is Going On With Northern Rock?

Northern Rock has increased mortgage rates and pulled many savings accounts in an attempt by the government to shift borrowers and savers onto other institutions. Both measures have had unintended consequences.

For some who bought property near the height of the bubble and who are now coming off fixed rate deals, the blow has been devastating. Not only are many facing large increases in payments as their fix rated mortgages end and they are pushed onto the Standard variable rate, the absolute worst rate to be on, but they are paying more than borrowers of other institutions as the government tries to slim down the loan portfolio.

The portfolio will be slimmed down, but not in the way that many think. The era of the state repossession is upon us. Borrowers who can't remortgage after borrowing 100% or more of their homes value a few years ago are now not only in negative equity and unable to move to a new mortgage provider, they are also being punished by higher interest rates and unable to remortgage onto a fixed rate deal since no other lender will have them. Of the mortgage holders who have some equity in their homes, they are being forced to pay 2% arrangement fees for new mortgage products at a time when house prices are falling. They are caught between fearful bankers, a government which has turned its back on them and a falling market.

What will happen to these poor souls? Many will be forced to sell or be repossessed if they can't afford the new monthly payments' at a time when disposable incomes are being squeezed from every angle.

Savers flooding into Northern Rock hope to benefit from the governments deposit guarantee has seem their deposit rates quickly approaching the 1.5% of capital level that Northern Rock agreed not to exceed once it was nationalised. This makes sense. The queues to get money out of northern rock have turned into queues to open deposit accounts so safeguard against more bank failures or a collapse of the system. The government's response has been swift and clear. Savings accounts are being cut in number and in return, but the tide shows no signs of turning back. People aren't necessarily worried about return....safety and preservation of capital is the new game.

So, taken all together, the government has a captive audience of borrowers who are paying punitively high mortgage rates and savers who are accepting tiny interest rates in exchange for government backed 100% capital guarantees.

Who said banking was in bad shape? For the UK government at least, it's making a killing. Then, when you make the laws and control the nation's money...anyone can make a killing.