Lloyds TSB in mortgage deal with Northern Rock

British bank Lloyds TSB has struck a three-year deal to take on customers of government-owned bank Northern Rock who are coming to the end of fixed rate mortgage deals, it said yesterday.

Certain Northern Rock mortgage customers will be offered the opportunity to switch to a Lloyds mortgage from next month.

The banks said the deal will help Lloyds accelerate its new business growth in a low-risk manner and assist Northern Rock reduce the size of its balance sheet.

Northern Rock said the deal should save jobs for 100 of its staff.

The banks did not estimate how many mortgages will switch under the deal, but Lloyds said it expects about 180,000 Northern Rock mortgage customers to come to the end of fixed rate deals in the next three years.

Lloyds has set a maximum loan to value ratio of about 80 per cent for the mortgages it will take on, but it said this will be flexible. It has some of the tightest lending criteria with an average loan-to-value ratio of 44 per cent on its mortgage book and 63 per cent on new loans.

Lloyds, owner of Cheltenham & Gloucester, has about a nine per cent share of the UK mortgage market, but has lost share in recent years.

Northern Rock plans to halve its mortgage book by 2011 as part of its turnaround efforts.

That has prompted concern its best customers will be taken on by other lenders and it will be left with the riskiest borrowers, just as housing repossessions are expected to rise.

It is meeting its target of redeeming over 60 per cent of mortgages, but it warned last month that arrears were rising and shifting customers could become more difficult as the economy worsens and rivals cut back on lending.

Northern Rock was taken under government ownership in February after almost collapsing after a funding crisis. Before its crisis erupted last September, Lloyds held talks to rescue the lender.

The European Commission said this week it had reservations about the rescue put together by the UK government, including concerns that it would last longer than necessary.

The Commission said it doubts "whether aid is limited in size and duration to the minimum necessary" and warned of possible distortions to competition and trade.

"In particular, it seems a more rapid and more profound downsizing could be implemented, allowing thereby a more rapid redemption of state facilities," the Commission said.