Distressed bank Northern Rock has been using part of its Bank of England loan to underwrite new risky mortgage business over the last week, continuing to offer first-time buyers loans worth more than 100 per cent of their property's value.
The lender's "Together" product offers first timers a mortgage of up to 95 per cent of the value of the property, as well as an unsecured loan of up to £30,000. Those buying properties in the £100,000 price band, and taking the full £30,000 loan, are immediately in heavy negative equity from day one of the agreement.
The bank is also continuing to offer people up to six times their salary – as long as they have a good credit rating. Even poorer credit risks can borrow more than four times their annual income from the bank if they agree to take a fixed-rate loan of five years or more.
The Bank of England, who has extended an open-ended banking facility to Northern Rock to help it survive the difficult market conditions – refused to comment on whether it was concerned about the bank's continued risky lending practices. "We haven't disclosed the terms of our agreement with Northern Rock," said a spokesperson for the Bank of England. "The Governor has said the terms will be disclosed in due course."
In spite of continuing to stay open for business as usual, Northern Rock is no longer one of the most competitive lenders in the mainstream mortgage market, and so is likely to be seeing a smaller intake of business than usual.
However, a Northern Rock spokesman said the bank denied that it had deliberately tried to price itself out of contention: "For a long-time now, we haven't competed only on rates," he said. "It's about the whole package – the flexibility of our mortgages, our service. We're still open for business as usual."
Brokers confirmed yesterday that they were still continuing to sell Northern Rock products. David Hollingworth of London & Country, the mortgage broker, said his company had sold two Northern Rock products over the past week: "Their fixed rates are very flexible and they've got some niche products, such as the 'Together' mortgage that can be attractive once in a while," he said.
Melanie Bien of Savills Private Finance, another broker, said her company had also recommended a handful of Rock mortgages over the past week: "If it's the right mortgage, then we would continue to recommend it to our customers," she said. "We don't feel the events of last week would have any adverse effects on new mortgage customers."
Shares in the bank continued to plumb new depths yesterday, hitting new lows of 160p before closing down 11.5 per cent at 172p, giving the company a market value of just £725m