Shame On Northern Rock!
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It's been nearly three months since the Government nationalised the wreck that was Northern Rock.
Since then, the Government has repeatedly called on mortgage lenders to do more to help "struggling borrowers". The Chancellor, Alistair Darling, has even offered to swap lenders' mortgage debts for £50bn in cash -- an unprecedented move -- in a bid to increase liquidity and encourage lenders to bring down their interest rates.
"I hope the benefits of... the reduction of interest rates and the additional money and support the Bank of England has been able to give... will get passed on, particularly to mortgage-payers," he said last month in Parliament.
Unfortunately, to date, UK mortgage lenders have largely ignored Mr. Darling's plea to pass on to customers "the benefits" of that £50bn lifeline.
In fact, mere hours after the cash was offered, Abbey responded by increasing its rates, with Halifax (the UK's largest mortgage lender) following suit shortly afterwards. And so far, nearly 40% of the UK's mortgage brands have failed to pass on the latest cut in the Base Rate to their customers.
So what about Northern Rock? How has it responded? Is it passing on the reductions in interest rates? Or has its own behaviour towards its customers - and staff - left something to be desired?
Go Away
When the Bank of England reduced its Base Rate by 0.25% last month, Northern Rock only passed on a 0.1% cut to its customers, keeping its Standard Variable Rate (SVR) at a eye-popping 7.49%.
That's compared to an average industry SVR of 7.11% and a Base Rate of just 5%.
The Rock openly admits it is deliberately offering its customers an uncompetitive rate in order to encourage them to redeem their mortgage at the first possible opportunity and move elsewhere.
This is because, in order to become a smaller, more financially viable lender that can be sold back into the private sector, Northern Rock is trying to reduce the amount of assets on its books by 50%.
In other words, as part of its strategy to pay back the taxpayer, it's trying to get rid of its existing customers.
Do The Ends Justify The Means?
While I would hesitate to commend a mortgage lender for offering uncompetitive rates in today's current difficult mortgage climate, I think it is right that Northern Rock should prioritise repaying its debt to the taxpayer... to some extent.
The question is: do the ends justify the means?
While many of Northern Rock's customers will have no problem finding a competitive new mortgage deal, some of them will find it very difficult indeed -- if not impossible.
For example, all those borrowers who took out one of the Rock's infamous ‘125% mortgages' while it was still offering these risky deals. They are likely to see their payments escalate dramatically when their current deal comes to an end and they are forced to move onto the SVR.
And they are not in a position where they can easily remortgage to a more competitive rate, either, since no lender is currently offering these dreadful deals to new customers. (If you are in this position, it's a good idea to speak to a whole-of-market broker to get professional advice about what you should do.)
The Worst Timing Ever
Some of you may be reading this and thinking: I have little sympathy for borrowers of 125% mortgages. They should have known better than to take out such a deal in the first place.
But what about the staff at Northern Rock? After suffering the terrible queues last summer and the anxiety of the future of the Bank over the past six months, a third of the workforce now face redundancy.
Again, those redundancies are arguably in the best interests of the taxpayer.
But, to add insult to injury, staff who are made redundant are likely to lose their eligibility for ‘staff mortgages' -- which have rates as low as 3.65% -- and so may be moved onto the SVR.
That means they could face a 3.84% increase in their mortgage interest payments at possibly the worst time ever: when they are out of work.
What's more, until they find a new job, other lenders are unlikely to consider them for a new mortgage.
Shameful Behaviour
It is not only for these reasons that I think the failure of Northern Rock to pass on the full Base Rate cut to its customers is shameful.
Yes, the Rock has to repay the taxpayer -- but equally, because the taxpayer is the owner, I believe the Rock should be setting an example for all other lenders to follow.
Otherwise, when the Chancellor takes the moral and political high ground and calls on lenders to start treating their customers better, they can legitimately turn around and say: the pot is calling the kettle black.
Indeed, one such lender did so when I spoke to the press office about this very issue.
It seems to me lenders don't need any excuses to hide behind when they are hiking up their mortgage rates.
Perhaps the Chancellor should have a little think about this.....
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