GARETH COLLINS

Mortgage bank Northern Rock has admitted it had acted too late to stem the losses from offering cheap fixed rate home loans amid a rising interest rate climate.

The group said margins would be impacted this year and next as the group made less money from its popular fixed-rate mortgages, with borrowers on mortgages set two or three years ago at rates far below current deals.

Northern Rock stressed it had now taken action to help avoid a similar hit to underlying profits, but added both this year and next would see a hit to the bottom line.

It came as Northern posted underlying half-year profits of £346.6 million, an increase of 26.6% on a year earlier.

The lender warned last month net interest income would tumble by around £180 million to £200 million for the full year, leading to a 11% share price drop in one day.

But Northern Rock said it would also see growth in underlying profits come in at the bottom end of its targets for 2008, at around 15%, although full year profits will be broadly in line with analyst forecasts.

The Newcastle-based group painted an otherwise positive picture of the lending market, with another record achieved for half-year gross lending, up 30.5% on the same period last year, at £19.3 billion.

Soaring house prices helped offset a slight lull in home buying activity as a result of the five interest rate hikes since last August, claims the group.

Remortgaging levels had also risen as borrowers sought to protect themselves against further rate increases.

The group posted a slight increase in the number of borrowers behind with repayments, with arrears levels at 0.47% last month against 0.45% the previous summer as the rate rises continued to burden debt-stretched consumers.

The number of properties repossessed almost doubled to 1,314 in the first six months of the year, from 662 at the end of 2006.

The group's tactics to increase the quality of its mortgage book and tighten its lending criteria had kept arrears levels down to less than half the industry average, however.

But Dave Jones, Northern Rock finance director, said the company could have potentially avoided the expected slowdown in full year profits growth.

He said the group was left over-exposed to the quick succession of interest rate changes and had now "adopted a more forward looking policy" to help protect against future rapid rate rises.

Collins Stewart banking analyst Alex Potter said the "mismanagement of rate risk" had heavily impacted margins and would likely lead to a reduction in the consensus market forecasts for 2008 profits after Northern Rock's comments.

Northern Rock said house price growth would continue to slow in the second half of the year.