Northern Rock faces being shrunk to half its present size, with big job losses, under plans drawn up to satisfy European Union competition rules, The Times was told last night.

Alistair Darling will tell Brussels today that he wants to continue giving state aid to the bank, which was nationalised last month after ministers decided it was the only way to get it through its troubles. But the radical slimming down, which could mean that thousands of the bank’s 6,500 jobs will go, is judged by the Treasury to be necessary to meet the EU’s stringent rules for helping firms.

The difficulties in the mortgage market are underlined today by figures showing that about 250,000 home-owners will face a £1,000 or more rise in mortgage repayments when they come off their existing deals this year.

It also follows a traumatic weekend in New York after the collapse and bail-out of Bear Stearns, the investment bank. Investors are braced for more turmoil today as fall-out continues to shake stock markets. The situation forced Henry Paulson, the US Treasury Secretary, to promise that the Administration was “prepared to do what it takes” to support troubled financial institutions.

The full business plan for Northern Rock, being drawn up by Ron Sandler, its government-appointed chairman, will not be ready for about two weeks, when Mr Darling will make a Commons statement. But the Chancellor is fully aware of its direction and will notify the European Commission today of the broad details to enable it to begin an investigation. Approval of the original rescue plan expires today.

To be successful he has to convince Brussels that the bank can be viable over the long term without taxpayer help and that it will curtail some of its current activities to balance the competitive advantage it has by getting government help over its banking rivals. It cannot be allowed to maintain a market-leading position.

Figures published with the Budget showed that the Treasury expects Northern Rock to repay £10 billion of its £24 billion Bank of England loans in the next financial year. That means the bank will take on far less new mortgage business than in the past and some borrowers coming to the end of fixed-term loans will be advised to look elsewhere. The Times was told that the £110 billion mortgage book could eventually be cut in half.

Meanwhile, about 213,000 borrowers who took out cheap five-year, fixed-rate deals in 2003 will face rises of more than £100 a month when they remortgage. The best rate available on a five-year deal in 2003 had a rate of 3.94 per cent. The lowest rate on offer with an equivalent deal now is 5.58 per cent. The difference in monthly repayments on a £150,000 loan is £141.

Experts gave warning that the payment shock would hit “safety-first” borrowers, who had chosen the longer-term deals in preference to cheaper two-year fixed rates because they offered more security. This group includes young families in their second and third homes, as well as couples approaching retirement who have only a few years left on their mortgage term.

David Hollingworth, of the mortgage broker London & Country, said: “In 2003 these people got a cracking deal and were rewarded for their cautiousness but borrowers now need to prepare for a rise in repayments.”

The Council of Mortgage Lenders reported a surge in the popularity of fixed rate mortgages in mid2003 as the deals became cheaper. About 5 per cent of borrowers on fixed-rate loans say that they have no idea how they will meet their repayments when their current deal expires, according to Mortgage Monitor, the online broker.

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