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Sandler says 5% fall in house prices would strain Rock plan

Northern Rock executive chairman Ron Sandler has admitted a serious fall in house prices could significantly dent the bank’s plan to pay back its £27bn Bank of England loan by 2010.

Speaking at a Treasury Select Committee hearing today, Sandler said the bank had thoroughly stress-tested its plan but if the state of the housing market worsens it would take its toll.

He said: “If house prices were to decline seriously, 5, 10, 15 per cent, it would certainly put a great deal of stress on our ability to deliver the plan.”

But Sandler refused to speculate on what figure of house price decline would cause the plan to fall over.

He said the bank was aiming for a 60 per cent redemption rate by forcing 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.

The bank has already paid £2.8bn towards its BoE loan since the beginning of the year and plans to have paid off 25 per cent by the end of 2008.

Sandler said Northern Rock was in consultation with trade unions after it announced it would cut 2000 jobs by the end of 2010, the bulk of which will take place this year. He said the bank was trying to find another lender to employ some of its staff but ensured they will receive fair redundancy pay outs.

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