Northern Rock U-turn as FSA springs surprise relaxation of banking rules

Northern Rock is to start lending again after a Government U-turn means it will no longer have to show customers the door once their current deal is finished

Northern Rock is to start lending again after a Government U-turn means it will no longer have to show customers the door once their current deal is finished

Taxpayers have been warned they will have to wait even longer to get back their money from the disgraced Northern Rock.

The State-owned bank was meant to have paid back every penny by the end of 2010, but its repayment plan has been dramatically ripped up.

The decision was taken in a desperate bid to ease Britain's mortgage drought which is crippling homeowners who need to get a new loan.

The Government has announced a radical U-turn which will see the former building society trying to lend, rather than trying not to.

Since its nationalisation, Northern Rock has been urging its 800,000 mortgage borrowers to leave the bank when their current deal ends.

By redeeming their mortgage, the bank was able to use the money to repay its loan of taxpayers' money.

It is going to stop 'actively encouraging' its customers to quit the bank when their current deal, such as a two-year fixed rate mortgage, expires.

This policy, laid out in its business plan last March, was putting undue pressure on other lenders in Britain.

An army of ex-Northern Rock customers were knocking on their doors trying to remortgage their loan at a time when lenders have little to lend.

Under the new plan, which will need European state aid approval, they will be offered decent deals by Northern Rock, rather than getting a letter urging them to quit.

A statement from the bank said: 'In order to support Government policy to increase mortgage lending capacity in the market, the company confirms that it is slowing down the rate of mortgage redemptions.

'This means that more mortgage customers will be able to stay with Northern Rock.

'A reduced level of redemptions will lead to Northern Rock repaying its loan to Government at a slower rate.'

The bank is also likely to start trying to win new mortgage customers as well as encouraging its remaining 600,000 mortgage customers to stay.

At present, the bank is one of the least competitive of Britain's top 10 lenders, offering deals which only the desperate would sign up to.

Its two-year fixed rate for anybody borrowing 65 per cent or less of the property's value charges 4.79 per cent. Rival lenders charged 3.99 or less.

Northern Rock's standard variable rate will be 5.09 per cent from next month, far higher than some of its rivals which charge just 3.5 per cent.

By changing the strategy at the bank, the Government hopes to improve the availability of mortgages to first-time buyers and homeowners who need to remortgage.

A revised business plan is currently being worked on by the bank's management team, the Treasury and other external advisers.

It is expected to be published in the next few weeks, but will then go to Europe to be approved before the bank can change its strategy.

Latest figures, from October, show the bank has £11.5billion to repay, which means it is far ahead of its repayment schedule.

Northern Rock said the new plan will have 'no impact' on savers.

The bank has become a safe haven for nervous investors who flocked to the bank which offers a 100 per cent guarantee on deposits, unlike its rivals.

FSA surprise

Banks could have billions more to lend to credit-starved companies and households following a relaxation of the banking rules.

In a surprise move, the City watchdog eased the rules governing the capital cushions kept by High Street banks.

The Financial Services Authority has told lenders they could operate on slimmed-down buffers from now on.

Experts say the move could free up billions in money to lend to businesses and consumers over the coming months.

Normally banks must maintain big enough capital cushions to cover customer withdrawals and to insulate themselves against soured loans.

But the FSA tightened up the rules in October after the collapse of Wall Street bank Lehman Brothers unleashed unparalleled mayhem on financial markets.

The regulator moved because it feared that British banks would need to have bigger cushions in case more key institutions went under.

The more onerous rules were blamed for exacerbating the credit drought.

The FSA's U-turn underlines the severity of the financial crisis now engulfing Britain.

International rules require banks to put more cash aside in times of economic hardship.

But British banks will be allowed to operate under a less rigid restrictions because the country cannot afford the mortgage drought to continue.

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