Northern Rock hits ?7.8bn loan record

Rising house prices combined with falling interest rates helped Northern Rock achieve recording lending of £7.8bn in the first half of the year as home owners remortgaged their property.

The Newcastle-based former building society expects remortgaging - where home owners do not move house - to continue to be strong in the second half of the year, particularly as penalties on existing mortgages fall away.

Bob Bennett, Northern Rock's finance director, predicted that the rise in house prices would slow to around 5% from approximately 25%, which could make it easier for first-time buyers to enter the housing market as the year progresses.

Kicking off the interim results season for the high street banks, Northern Rock said its profits had risen 22% to £186.2m as it increased its dividend by 15% to 7.5p. Profits were boosted by £7m from the sale of its credit card business.

Despite the seemingly upbeat figures, its shares fell by 16.5p to 680.5p yesterday amid concern about a fall in its profits margin. Other banks' shares were also lower.

Mr Bennett indicated that Northern Rock was determined not to expand outside its core mortgage business, and said any acquisitions would be in this area.

He cast doubt on Gordon Brown's plans to introduce a 25-year mortgage product to help to stabilise house prices.

The chancellor has asked David Miles, a professor of finance at Imperial College, to see how Britain could develop a market for long term loans that would be similar to those in mainland Europe and the United States.

But Mr Bennett said it was more likely that the US and mainland Europe would adopt the British model of shorter-term loans.

"Customers like two- and three-year fixed rate deals. I don't think the 25-year fixed rate will work and I'm sure Professor Miles will reach the same conclusion," he said. He warned the government against interfering in the mortgage market, saying that previous attempts to encourage change through the introduction of CAT-marked mortgages, with standard charges and terms, had not been taken up by customers.

Aside from customer demand for 25-year mortgages, Mr Bennett pointed to practical issues relating to how banks and building societies could structure such long term deals - particularly if interest rates were to begin rising again.

Mark Thomas, an analyst at investment bank Fox-Pitt Kelton, said the fall in the shares was in part due to questions about the reduction in profit margins.

"The long term story is strong," he said, but he added that issues remained to be resolved about short term prospects.

Northern Rock uses the City capital markets to help raise money in order to sell more mortgages through "securitisation" deals.

Mr Bennett said another securitisation was likely to be launched some time later this year, and indicated that the bank was likely to explore fundraising opportunities similar to the innovative covered bond issued by HBOS earlier this week.

With interest rates at 48-year lows of 3.5% after last week's interest rate cut, Northern Rock has reduced its standard variable rate mortgage by 20 basis points to 5.49%.

Mr Bennett defended the bank's decision not to pass on the full 25 basis-point cut in base rates announced by the Bank of England because its standard variable rate was lower than the rates offered by some of its rivals.

Other lenders also cut their rates yesterday.

Royal Bank of Scotland and NatWest, which are part of the same group, announced a 0.23 percentage point reduction in their standard variable rate to 5.59%, while HSBC - which is positioning itself as the lowest charger on the market - cut its home buyer mortgage variable rate by 11 basis points to 4.49%.

Internet bank Intelligent Finance, which is part of the HBOS group, is cutting its rate by 16 basis points to take its mortgage rate to 4.59%.