The Government’s decision to nationalise Northern Rock will bring mixed
fortunes for those with links to the troubled mortgage bank.
Small shareholders will now be biting their nails while they wait to see how
much money, if any, the Government will offer them for their stake in the
company.
Meanwhile, Northern Rock savers are in the unusual position of being offered
best-buy rates as the beleaguered bank struggles to hold on to their money.
Times Money offers this guide to the prospects for Northern Rock
shareholders, savers and mortgage customers.
Shareholders
The move to public ownership could be bad news for Northern Rock’s 140,000
small investors. They are in danger of ending up with nothing – or next to
nothing – if the government-appointed arbitration panel values the company
on its basic worth, stripped of government guarantees.
Robin Ashby, who heads the Northern Rock Small Shareholders’ Group, is
pessimistic about the chances of receiving generous compensation. He says:
“We fear that on the artificial calculation that the Government has
instructed the arbitration panel to use – which does not take into account
the government guarantees – the value of the company will be assessed as
zero.”
Alex Potter, an analyst at Collins Stewart, the stockbroker, is slightly more
optimistic. He says that there is a chance that shareholders will receive a
small payout, but he gives warning that it is likely to be a lot less than
the 400p a share that RAB Capital and SRM Global, Northern Rock’s two
largest shareholders, are seeking.
It is expected that the arbitration panel will take several months to decide
on what compensation figure, if any, is payable. If it is not close to 400p
a share, the two biggest shareholders are thought to be ready to sue the
Government.
They could be joined by the UK Shareholders’ Association (UKSA), which has
already engaged the services of Edwin Coe, the City solicitor. Roger Lawson,
of the UKSA, says: “We fear that the arbitration panel will put a zero price
tag on our shares so we won’t receive anything unless we fight for it.”
Savers
Northern Rock savers are in the happy position of being the best protected in
banking. Any deposits they have are guaranteed by the Government, whether
they are for £5,000 or £500,000.
Savers with other banks are covered by the Financial Services Compensation
Scheme, which protects an individual’s deposits in any one company, but only
to £35,000.
Anna Bowes, of AWD Chase de Vere, the independent financial adviser, says:
“Northern Rock savers not only enjoy the best protection for their accounts,
they also have access to some of the most competitive accounts in the
business. There is a Tracker Online account, paying 6.49 per cent on sums of
£1 upwards, which is very close to the top market rate of 6.55 per cent paid
by West Bromwich Building Society.
“However, savers should monitor the account carefully – it includes an
introductory bonus of 1.24 per cent, which drops away after the first 12
months.”
Northern Rock also has a pretty competitive one-year fixed-rate cash Isa,
paying 6.2 per cent. However, savers again need to bear in mind that, after
a year, it reverts to the less competitive 30-day notice rate, currently 5.5
per cent.
Mortgage customers
Like savers, mortgage customers will see no changes in the day-to-day running
of their accounts and will have to maintain their monthly payments in the
normal way. However, the bank, desperate to shrink its mortgage book, is
writing to all customers to inform them that they will not be offered
another deal at the end of their existing one, and will be switched
automatically to the standard variable rate of of 7.84 per cent. The bank is
suggesting that customers contact an independent financial adviser for help
in choosing another lender. One of the cheapest deals currently on the
market is First Direct’s 4.75 per cent with a £1,498 fee.
The taxpayer
If you think that Northern Rock’s woes have nothing to do with you, then think
again. Experts have calculated that every household in the UK is,
effectively, contributing £3,000 towards the £100 billion cost of propping
up the bank.
CASE STUDY
PREPARED FOR A PAINFUL BLOW NED WALSH, above, is one of the 140,000 small
shareholders in Northern Rock who fears that his holdings may be declared
worthless by the government-appointed arbitration panel.
The 83-year-old retired publishing executive from Lower Kingswood, Surrey,
bought his shares in 1999. For most of the past nine years they have moved
steadily upwards, hitting a peak of more than £12 last February. But it has
been all downhill since. He says: “I have a total of 1,000 shares. I bought
500 myself and inherited 500 from my wife when she died six years ago. I
have been trying to follow the twists and turns in the Northern Rock saga,
but it has been very confusing. One day we’re told that Virgin is the
frontrunner to take over, and the next that the bank is being nationalised.
“I think that we will be lucky to receive any compensation from the Government
now and I am disappointed at how things have turned out. I realise that if
you hold shares you must be prepared for losses as well as gains, but to
lose the entire value of the shares would be a painful blow.”
First-time buyers will be hit hardest
NORTHERN ROCK’S nationalisation is already beginning to affect other areas of
the mortgage market.
The bank withdrew its Together range of 125 per cent loans, made up of a
secured loan plus unsecured additional borrowings. But before the new
management scrapped the deal on Thursday, other lenders had begun pulling
their 100 per cent-plus mortgages – almost all of them targeted at
cash-strapped first-time buyers.
Alliance & Leicester, Coventry Building Society and Godiva Mortgages all
withdrew similar loans, leaving thousands of borrowers facing massive
repayment increases at the end of their loan periods.
Coventry says that existing borrowers with 125 per cent deals will be able to
obtain another competitive mortgage from the Society. Borrowers with
Alliance & Leicester will revert to paying the base rate plus 1.99 per
cent, or they can remortgage to another A&L loan or to another lender.
However, a 5 per cent premium will be added to the unsecured loan if they
move elsewhere. Northern Rock has not yet given details of a plan to assist
existing borrowers coming off their current deals.
Experts say that falling house prices, particularly for one and two-bedroom
properties, are the likely reason for the banks’ decision to withdraw their
loans, leaving first-time buyers on high loan-to-value deals at risk of
being unable to pay off their mortgages when they sell. David Hollingworth,
of London & Country, the mortgage broker, says: “The extinction of these
deals is down to falling property prices – lenders are nervous about losing
money. I urge lenders to put something in place to help those affected.”
The exodus will also leave aspiring property owners who do not have a deposit
facing a longer wait for their first homes.
Borrowers worried about remortgaging still have a few options. If the property
has grown in value, so that you now need a loan for only 95 per cent,
Melanie Bien, of Savills Private Finance, another broker, recommends a
two-year fix from Cumberland Building Society at 5.08 per cent. It has a
£995 fee but it offers a free valuation, up to £260, and legal fees.
Remortgagers unfortunate enough to still require a 100 per cent loan have slim
pickings. The Mortgage Works allows new purchases and remortgages on its 100 per
cent range but Ms Bien says: “The rates are not great.”
The three-year fix starts at 6.99 per cent with a £499 fee. Halifax lends up
to 97 per cent on its two-year fix for remortgagers, with rates of 6.59 per
cent or 6.74 per cent, depending on fees.
REBECCA O’CONNOR
