Rock mortgage book 'being shrunk'

A bill to nationalise Northern Rock was being debated on Tuesday

Northern Rock's mortgage book is already being reduced in size ahead of a move to public ownership, according to a mortgage broker.

Ray Boulger, from mortgage brokers John Charcol, predicted that the mortgage book would be cut by 50% in the next two years.

He said the previous management had already put up rates to downsize.

Meanwhile, savers would choose rates over security when deciding where to put their money, another group said.

The government wants to put the troubled bank into "temporary public ownership" in the hope of finding a long-term buyer.

It has been widely predicted that this will mean restructuring the business, with a reduced mortgage book and a cut in staff.

Fall prediction

Mr Boulger said that the management had already increased mortgage rates so that they were 1-1.5 percentage points higher than other lenders, effectively dissuading new customers.

Job cuts are expected

"The key point is the action the management have taken over the past few months. It was a lot of what was necessary to downsize the business," he said.

He estimated that 60% of customers were on two-year fixed deals and had started to walk away already.

Although up-to-date figures are unavailable, he said that Northern Rock's market share had already shrunk substantially and the rates policy meant they were getting about 10% of the new business they had been in the first half of last year.

He said another sign of the shrinking mortgage book was the fact that loans from the Bank of England had not changed significantly in recent weeks.

A spokeswoman for price comparison website Moneyfacts.co.uk also said that much of Northern Rock's business came from mortgage brokers, who would have been finding recently that the Rock's rates were higher than other lenders.

Increases in the Rock's mortgage rates could be painful for millions of homeowners, not just the Rock's customers Robert Peston, BBC business editor

It remained unclear whether the lender would remain in the 100% plus mortgage market.

The BBC Business Editor Robert Peston said new executive chairman Ron Sandler would rapidly shrink the Rock's mortgage operation.

"That would be achieved by putting up the cost of mortgages - which would encourage borrowers to repay by taking out loans with other banks," he said.

"The good news is that the proceeds of these redemptions would reduce the loans to the Rock from taxpayers."

But he said that if Northern Rock disappeared from the market, banking competitors could put up their mortgage rates.

"So increases in the Rock's mortgage rates could be painful for millions of homeowners, not just the Rock's customers," he said.

Moves by savers?

Questions have been asked as to whether savers would shift to Northern Rock, owing to the greater security it would offer under public ownership.

Customers queued to withdraw savings in September

Mr Boulger argued that in theory, savers' money was just as safe as it had been in recent months, and Northern Rock's savings rates had been competitive.

But Ewan Edwards, head of savings and investment at Alliance & Leicester, said savers were more likely to decide where to save based on the best rates, rather than security.

"On the face of it, they have a competitive advantage, but it is probably too early to tell and will depend on consumer behaviour in the next few weeks," he said.

"It might simply be a case of making up some lost ground."

That said, he added that there had been a surge in business in September and October for building societies and National Savings as people queued to take their savings out of Northern Rock accounts and put it in "traditional" institutions.

He said this was expected to "rebalance" over time.