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House price crash threat to Rock repayment

Northern Rock executive chairman Ron Sandler has admitted that a serious fall in house prices could significantly dent its plan to repay its £27bn Bank of England loan by 2010.

Speaking at a Treasury select committee meeting on Tuesday, Sandler said Northern Rock had thoroughly stress-tested its plan but a worsening scenario in the housing market could take its toll.

He said: “If house prices were to decline seriously by 5, 10 or 15 per cent, it would certainly put a great deal of stress on our ability to deliver the plan.” He refused to speculate on what level of house price decline would cause the plan to collapse.

He said that the bank was aiming for a 60 per cent redemption rate with a strategy for borrowers whose deals are expiring to move to its standard variable rate or remortage elsewhere.

Northern Rock previously had a redemption rate of 40 per cent and Sandler admitted that current conditions may make it difficult for the bank to hit its target.

Chief financial officer Ann Godbehere said the plan would theoretically withstand a redemption rate of 50 per cent and a fall in house prices to the level seen in 1992. She said the latter would see the loan repaid by 2011 instead of 2010.

Northern Rock has already paid £2.8bn towards its loan since the beginning of the year and plans to have paid off 25 per cent by the end of this year.

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