Northern Rock, is one of the UK’s top 6 mortgage lenders. It has built its business around mortgage lending, rather than promoting building society accounts. Northern Rock has also been one of the most willing financial institutions to give unconventional mortgages. It has also taken on a significant amount of adverse credit mortgages.
However, yesterday it was announced that Northern Rock had to borrow from the Bank of England, using the “lender as last resort”
What does lending from the Bank of England Mean?
- Northern Rock were temporarily short of cash to finance its lending. This is because banks are much less willing to lend money to buy credit. This is due to the fall out from the US sub prime mortgage defaults
- Northern Rock is not as risk of going insolvent. It has £113bn of assets. The only problem is that these assets are illiquid – tied up in the value of houses. This is why it needs to borrow short term cash.
- Their difficulties in borrowing cash, is more a reflection of the conservative attitude to lending. As the Chancellor Alistair Darling said: “There is a lot of money in the system but they are reluctant to lend it to each other”
- For this emergency lending, The bank of England charged an interest rate 1% above the base rate. This makes the borrowing more expensive for Northern Rock. If this emergency borrowing becomes more common place it could make mortgages in general more expensive. (even if base rates remain the same)
- To summarise it is very unlikely that UK building societies will go bankrupt. Because the Bank of England is always willing to act as lender of last resort, people have confidence in the banking system and don’t feel the need to withdraw money from their accounts.
- However, the global credit crunch will result in less attractive mortgages being put on offer. It will also become harder to get adverse credit mortgages