Northern Rock likely to report £500m loss

Northern Rock likely to report £500m loss

A rise in the number of homeowners failing to make mortgage payments on time and a restructuring charge are expected to drive Northern Rock towards a loss of around £500m when it reports on its finances in the first six months of the year later today.

In its first set of figures since being nationalised, the Newcastle-based lender is likely to shed fresh light on the difficulties some customers are facing in making their home loan payments. All the big banking groups are currently reporting their first half figures and most are demonstrating a rise in customers falling behind with payments which is causing a rise in arrears.

As Northern Rock offered loans up to 125% of the value of a property, its figures will also be analysed to determine how many of its customers are now in negative equity or facing the prospect of having loans larger their value of their homes in the light of projections that house prices could fall by up to 20% by the end of next year.

The dive into the red had been signalled by the new management team when the lender was nationalised. Ron Sandler, the chairman, had warned that the lender would be "significantly" loss-making - in stark contrast to this time last year when it was reporting profits of more than £200m.

Sandler has made it clear that his main aim is to repay £24m of outstanding taxpayer loans rather than generate profits and the figures out today are expected show that the government's money.....continued below

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is in the process of being repaid.

Northern Rock has ensured that as its customers' fixed rate mortgage deals come to an end, there is little incentive for them to stay with the lender as its new product range has been uncompetitive. This has allowed Sandler and his team to pay off the government when home loans are transferred to other lenders.

Northern Rock is reporting as the first anniversary of what has become known as the credit crunch approaches on August 9. This is the date the European Central Bank and US Federal Reserve started to pump money into the financial system. Northern Rock's problems did not emerge for another month and it was not nationalised for a further six months.

The lender will also be driven into the red by a charge to scale back its business. It is cutting 2,000 jobs in the next three years. Last week it announced that 800 people would be made compulsorily redundant as part of this programme under which 1,300 roles will be cut by the end of this year.

Sandler is committed to shrinking Northern Rock but also allowing it to conduct enough business to be returned into private hands in three years time.

The bank is aiming to attract savers whose funds can be used to support a scaled-back mortgage operation which was previously financed by selling bonds to major investors.

It was the seizing up of the money markets on which these bonds were sold that led to its problems last year.

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