Northern Rock and Remortgaging
September 17th, 2007 | by admin |This week Northern Rock is likely to see savers flock to the bank to withdraw their savings.
Last week, Northern Rock suffered a severe credit shortage. As a result they had to borrow emergency funds from the Bank of England to ensure liquidity for its mortgage business. The last time the Bank of England had to act as lender of the last resort was in 1973. Although the FSA and Bank of England said there was no chance of the bank going under, savers appear not to have been pacified, as a result £2 billion has already been withdrawn.
The problem of Northern Rock originated from the fact their mortgage lending was not secured by customer savings. Instead they borrowed from financial institutions. This was fine when the markets were doing well. But, since the sub prime collapse in America, lending has become a lot more conservative. As a result Northern Rock couldn’t get enough temporary funds.
Where does this leave Customers with a mortgage at Northern Rock?
Firstly, it is unlikely the bank will go under. It is in the interests of the whole UK banking system to prevent a bank going under. This will make future panics more likely. It is essential for the Bank of England to maintain confidence in banks and the financial system. Without rock solid confidence, the banking system will find it difficult to function.
Therfore, at the moment I would suggest those with a mortgage at Northern Rock, need not panic and seek to switch accounts.
It is quite possible the crisis may result in Northern Rock will be taken over by a bank like HSBC. IF this occurs it is of course essential to check if your mortgage changes and remortgage if appropriate.