Toucan

Mortgage arrears at Northern Rock have increased as tougher economic conditions hit borrowers.

Mortgages three months and over in arrears were 0.95 per cent at the end of April, compared to 0.57 per cent at the end of December 2007.

Overall credit quality of the loan book remains at a level assumed in the nationalised bank's recovery plan.

And arrears are set to increase, the Newcastle-based bank added.

In a trading statement, Northern Rock said: "The company has concluded that the controls over its policy to permit discretion in certain circumstances to capitalise amounts in arrears when the borrower has paid less than three monthly payments have been inadequate.

"Under revised procedures, any such discretion has now been removed. This change will result in higher reported arrears in coming months, with Northern Rock's performance here expected to move much closer to the industry average."

Northern Rock said it has been encouraging mortgage customers to switch to other lenders when they reach the end of their fixed or discounted periods in order to reduce its business to a "sustainable level".

The bank said it has established a panel to help customers search the market for new products to meet their needs and intends to develop this panel further over the next few months.

Gross residential mortgage lending in the first quarter was a modest £1.2 billion, the bank said, adding it intends to gradually increase new mortgage origination in while remaining significantly below historical levels.

Retail savings balances have begun to recover, Northern Rock said, and ended the quarter at £12.8 billion.

Ron Sandler, executive chairman, said: "I am pleased to report that solid progress has been made against our business plan.

"While arrears have increased, the credit quality of the loan book remains satisfactory and at a level assumed in the plan. Clearly the outlook for the UK mortgage market is uncertain but progress against our business plan to date is encouraging.

"We remain firmly focused on our business priorities of repaying the government debt, releasing the guarantee arrangements and, in due course, returning Northern Rock to private ownership."

Northern Rock was nationalised in February, after the government rescued the lender from the brink of collapse. The bank owed the Bank of England £24.1 billion at the end of March, according to Northern Rock's figures.

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