If you are a Northern Rock customer you might be feeling a little worried right now!
Shares in Northern Rock, one of the UK's biggest mortgage lenders, have plummeted more than 40% in the last few days after it had to ask the Bank of England for emergency funding on Friday night!
But experts say it does not mean Northern Rock is in danger of going bust (despite the media hysteria over this!) especially as last night the Government last night issued an emergency pledge to Northern Rock savers that their money is safe!
The move, (effectively a blank cheque from the Government) means that Northern Rock savers would not lose a penny, regardless of how much they had deposited.
In effect, this would nationalise the Northern Rock if it went out of business, potentially leaving tax-payers to pick up the bill of about £28 billion of deposits!
In fact over the last few days over £2 billion has been taken out of the Northern Rock by its customers, who clearly have been worried by the events of the last few days!
However, this does not help the situation as all it does is increase people's paranoia about the situation and whether they will lose their money!
For a sensible view on this, you should read the Money Saving Expert Northern Rock Crisis Guide.
BBC business editor Robert Peston said the £2 billion withdrawn from Northern Rock; (which is about 8% of the £24billion deposits it held on Thursday when everything went a bit pear shaped!) was actually less than the mortgage lender and officials at the Bank of England and FSA had feared.
However it cannot be certain whether much more will be withdrawn in the coming days, especially from holders of Northern Rock's postal accounts, which contain about £10 billion.
There have also been losses among other banks as their shares fell too. Alliance & Leicester, which suffered sharp falls on Friday, lost another 14% and Bradford & Bingley was 11% lower. HBOS lost almost 5%.
Chancellor Alistair Darling said that Northern Rock was the only institution to have called for Bank aid and that the economy and banking system were sound:
"There is plenty of money in the system, the banks have got money ... they are simply not lending in the short-term way that institutions like Northern Rock need," he said.
Mr. Darling said that "in order to create a stable banking system, the Bank [of England] steps in and it makes facilities available to the Northern Rock."
"If people want to get their money out of Northern Rock bank, they can do it. The money is there and it is backed by the Bank of England so they can get it," he said.
But the panic withdrawals of people taking their money out of Northern Rock shows just how much people don't listen!
It has been said that your money is safe and so you don't need to take it out...but by ignoring all the advice and running on the banks many of you are now making the situation far worse!
However, we are aware that for many of you this is a worrying time:
So what if I am a borrower?
- Northern Rock's rates for new borrowers are likely to go up as a result of all of this but if you are an existing customer you really shouldn't worry.
- About 80% of you who borrow with Northern Rock have fixed rate deals so your rate will not change during its term.
- About 10% of you have a tracker linked to the bank of England base rate and your repayments will only give up only if the Bank of England raises theirs.
- The rest of you are on the standard variable rate of 7.84% which could go up; although the Northern Rock insisted it had no plans to do so.
So what if I am saver?
- Northern Rock needs to keep hold of your cash to help it through this funding crisis. Rates on some deposit accounts have already reached 7% and the bank may offer some competitive deals to keep you on.
- You would get back the first £2,000 back in full and 90% of the next £33,000 -so about £31,700)
- The best thing of all is to make sure you don't have more than £35,000 in any one savings account; spread your savings around!
But what if Northern Rock goes bust?The emergency package for Northern Rock was the first time the Bank of England has been called on for longer-term help during the current crisis.
It is also understood Northern Rock was almost sold to rival bank Lloyds TSB, but the deal fell through because of the difficulty of borrowing money in the current financial climate. In fact the lower the Northern Rock share falls the easier it would be for a rival to take it over.
Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business. It raises most of the money which it provides for mortgages by borrowing from banks and other financial institutions.
Based in Newcastle, the bank employs 6,300 and it has 800,000 mortgage holders and, over the first half of 2007, was the largest single new mortgage lender in Britain, with a near 19% share of the market. It also has 1.4million customers with savings accounts.
So, this could be a tricky few days for the money market, but Northern Rock could be fine in a few days (although it might look slightly more different!).
Here at the Money Hospital we understand it is a bit stressful if your money is stuck between Northern Rock and a hard place: but that is no excuse for mass hysteria!!
As the old saying goes "trust me, i'm a doctor"!