Northern Rock lures savers and deters borrowers

A woman passes a Northern Rock bank branch in central London November 19, 2007. Ailing British bank Northern Rock has upped its efforts to attract new savers, while retrenching from the mortgage market, since liquidity woes plunged it into crisis three months ago.

LONDON (Reuters) - Ailing Northern Rock has upped its efforts to attract new savers, while retrenching from the mortgage market, since liquidity woes plunged it into crisis three months ago.

Britain's fifth-largest mortgage bank has made wide-scale changes to its retail product offering, many of which have taken place in the last fortnight.

The bank is offering savers a loyalty bonus and has hiked rates on a range of savings accounts to try and stem an exodus of savers and bolster funds held on deposit.

At the same time, it has withdrawn mortgages, loans and a credit card, and increased borrowing rates to dissuade new customers.

News that Northern Rock was forced to call on the Bank of England (BoE) for emergency funding in mid-September, after failing to raise funds on wholesale markets, sparked the first run on the savings of a major British bank in 140 years.

Customers queued outside branches to withdraw their money, and the central bank and the Treasury were forced to guarantee new and existing deposits to curb the outflow.

Northern Rock has subsequently vied to make its savings products more attractive.

It is giving those who held one of its savings accounts on December 1 a bonus of 0.5 percent gross annual interest for the months of January and February, if they keep their money invested until March 1, 2008.

"You have kept faith with Northern Rock, and we'd like to start paying that back," the company says on its Web site.

The bank has also increased the competitiveness of its online "silver saver" (open to those aged 50 and over) and online tracker, hiking rates by 0.19 percent and 0.18 percent respectively to 6.49 percent.

The move has pushed these accounts up the best buy charts, but some of Northern Rock's other savings products are less competitive.

Its instant-access mini cash individual savings account, for example, pays just 4.79 percent, 1.51 percent below the 6.3 percent paid on National Savings & Investments comparative product.

Its branch saver pays 5.5 percent, while the Halifax's guaranteed saver pays 0.75 percent more at 6.25 percent (including an introductory bonus of 0.5 percent).

And its two-year fixed-rate bond pays 0.25 percent less than Chelsea Building Society's comparative product -- 6.4 percent versus 6.65 percent.

"The increases to Northern Rock's leading savings products -- including taking the top spot in the over-50s best buy charts with its 'silver saver online' -- are a clear sign it is keen to win back some much-needed savings balances," says Lisa Taylor, an analyst at price comparison site Moneyfacts.co.uk.

"(But) with so many competitive savings products available, it will be interesting to see if these latest rate rises are sufficient enough to lure savers back to Northern Rock."

Meanwhile, the bank has scrapped unsecured borrowing products: it withdrew its base rate Visa card, backed by the Co-operative Bank, from sale to new customers from the end of last month, and pulled its funding of Eskimo Loans, while increasing its own loan rates by 2 percent to 10.9 percent.

Mortgage products have been pulled too.

"Even Northern Rock's secured lending has seen a tightening of criteria and (it) is currently bucking the market trend by increasing fixed rates," adds Taylor.

Just after the bank was plunged into crisis it withdrew around 75 percent of its residential and buy-to-let home loans. Since then it has halved the number of buy-to-let loans it offers to just 11.

Northern Rock has traditionally done well in the first-time buyer sector and 100 percent-plus mortgage arena.

It has, however, withdrawn all five-year products in its "together" mortgage range -- which allow homeowners to borrow up to 125 percent of a property's value and is aimed at first-time buyers -- pulled two-year "together" fixes and replaced them with rates that are 0.30 percent higher.

Almost 60 percent of Northern Rock's new mortgage business is written by intermediaries -- and many of them have lost confidence in the lender, according to Business Development Research Consultants (BDRC).

Some 52 percent of mortgage brokers said they would recommend the bank to first-time buyers in February, but that figure fell to just 37 percent at the end of October.

Its dominance in the 100 percent-plus sector has suffered less severely -- falling to 78 percent from 85 percent, according to BDRC -- though the bank is facing increasing competition from Alliance & Leicester and Birmingham Midshires.

Independent mortgage broker Savills Private Finance says the rates on Northern Rock's prime residential mortgages, numbering around 65, are the main deterrent to placing loans with it.

"Northern Rock was always famed for offering solutions to certain problems and being innovative, but while these qualities still apply, the rates detract from what it's doing," says Savills director Melanie Bien.

"With two-year flexible fixed rate deals starting at 6.79 percent with a 1,995 pound fee for a maximum LTV (loan-to-value) of 90 percent, they are pretty expensive.

"This is true across its range of products, which is nothing special as the lender has stepped back from the market.

"We, and other brokers, are doing very little business with it as a result."

However, Bien says Northern Rock still offers "some nice quirks", such as its buy-to-let fast track guarantee.

It will accept the rental yield given by the borrower over that of the valuer, as long as the intermediary confirms this and it satisfies Northern Rock's rental calculation of 100 percent of mortgage interest at a notional rate of BoE base plus 1.25 percent.

Northern Rock is estimated to have borrowed as much as 29 billion pounds from the BoE, and is now seeking a buyer.