Northern Rock makes a £500m loss

Northern Rock is paying its loans back faster than expected

Northern Rock is set to announce that it has made bigger-than-expected losses of £500m in the six months since being nationalised, the BBC has learned.

The government intervened in February following the first run on a British bank in more than a century.

Much of the loss will come from the charges it takes to cover losses from struggling mortgage borrowers.

But Northern Rock has been paying back its loan from the Bank of England faster than it had predicted.

Most attention will be on the charges it takes to cover losses it expects to suffer on mortgages made to financially stretched homeowners Robert Peston, BBC business editor Read Robert Peston's blog

Northern Rock faces particular difficulties because it offered loans of up to 125% of the value of a property.

Borrowers coming to the end of a fixed-rate deal on such a loan and trying to remortgage will now find it hard to borrow as much as 95% of the value of their property, and the value of the property may also have fallen.

At the worse end

There will also be costs relating to the shrinking and reorganisation of the business, including job losses.

The BBC's business editor Robert Peston says he expects Northern Rock to report on Tuesday that the losses are at the worse end of what it expected when it drew up its business plan.

But he stressed that even greater losses would not be a problem for the bank's customers because it is now state-owned and cannot fail.

The faster-than-expected progress with paying off the £29.6bn it owed the Bank of England at the end of last year is a result of the way it has been encouraging borrowers to pay off their mortgages early or move their business to other banks.

The bank has made a deal with Lloyds TSB, for example, that involves borrowers coming to the end of their fixed-rate deals being encouraged to switch to Lloyds.

Emergency funding

Last September, a lack of liquidity in the money markets forced Northern Rock to go to the Bank of England for emergency funding.

When news of the funding emerged, savers withdrew millions of pounds from the bank in the following few days.

With the bank billions of pounds in debt to the tax-payer, the government had a big say in its future.

It eventually decided to nationalise it on the grounds that none of the potential bidders for the business would provide good value to tax-payers.

Liberal Democrat Treasury spokesman Vince Cable said such results would suggest the government had been "badly deceived" over the quality of Northern Rock's mortgage book.

"I am encountering cases of people being repossessed as a result of deeply foolish loans and the bank and the taxpayer who now own Northern Rock are having to absorb the resulting losses," he said.