First-time buyers boost Northern Rock

Booming sales of a controversial mortgage that lets first-time buyers borrow nearly six times their income and 125% of a property's value helped Northern Rock increase net lending by 14% in the first quarter of 2006. The bank, Britain's eighth biggest, said bumper lending will feed through to higher profits, and pencilled in £350m for 2006, up 14% on last year. Its "pipeline" of lending stands at £5.7bn, 15% up on the same period last year and 8% higher than at the start of 2006.

The figures confirm the mild recovery in the housing market after a slowdown in 2005, driven by a small increase in first-time buyers and a bounce in confidence among buy-to-let investors.

Northern Rock is the market leader in mortgages for first-time buyers, which bolt on a personal loan so buyers can purchase homes that might otherwise be outside their price range.

The "Together" deal has proved popular with buyers struggling with sky-high prices. In 2005 Northern Rock lent £7bn in Together mortgages, equal to about one in six of all loans to first-time buyers in Britain. Last year the loans made up 29% of the bank's lending, a figure that is expected to move even higher as first-time buyers return to the market.

A spokesman rejected suggestions that Together is a risky product, and said it applies strict affordability tests on applicants. It said that arrears on its mortgage book are below 0.5%, or less than half the industry average. But it added that given its forecast of broadly flat house prices in 2006, it will seek "quicker crystallisation on defaulting loans where they are higher-risk loans". In other words, it will take action earlier on arrears cases if the borrower has a high loan-to-value mortgage.

Shares in the bank fell 8p to £11.75, though this follows a strong run in the share price, which is up nearly 50% over the past year amid continuing takeover speculation.