Fixed rates hit Northern Rock profits

Updated 11.01 Wed Jun 27 2007

Keywords: mortgage, profits, Northern Rock

Northern Rock has announced annual profits will be hit due to rising interest rates taking their toll on margins from previously fixed-rate home loans.

The building society said it is making less money from its fixed- rate mortgages while waiting for customers to come off deals which were set two or three years ago.

The building society said it was making less money from its fixed- rate mortgages while waiting for customers to come off deals which were set two or three years ago.

Some borrowers, whose mortgages were fixed in 2004 and 2005, are paying more than one percentage point less compared with those on offer now to new customers.

A borrower who took out a three year fixed rate mortgage with Northern Rock in 2005 would now be repaying at a rate of just 4.89 per cent.

Chief executive of Northern Rock, Adam Applegarth, said the mortgage market stayed "robust" despite the four rate rises since last August.

Shares in the company fell by 11 per cent and underlying profits for the year are expected to increase by 15 per cent on last year - missing analyst expectations of 17 per cent and contributing to a drop in net interest income of around £180 million to £200 million.

Analysts at Numis Securities said that Northern Rock's cost efficiency structure meant that the bank is "strategically very well placed" to cope with the increasing arrears levels and lower margins from fixed-rate mortgages.

They also added that the changes in the interest rate cycle will even out any loss of profits from the fixed-rate deals.