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13th December 2012

Northern Rock is to refund £270m to borrowers. This “bad bank” (now known as NRAM or Northern Rock Asset Management) was previously nationalised so the refunds are effectively to be funded by the taxpayer.

Why are these refunds due? Northern Rock did not comply with an amended Consumer Credit Act stipulation that loan statements should include detail of the original loan amount. Taxpayers might conclude that this technical error did not significantly diminish the rights or interests of borrowers and that the scale of repayment is therefore excessive. Borrowers however are likely to be delighted with the scale of the payments due to them.

The average refund of interest payment is believed to be nearly £1800.

The origin of the problem is believed to primarily be the Northern Rock “Together” product. This was a mortgage that also offered an accompanying unsecured loan. The total value of the borrowing could be very large. People could often take out a mortgage with a 95% loan-to-value secured against their home and also an unsecured loan of up to £25,000. Even in the pre-credit crunch era the sheer size of these unsecured loans was unusual, let alone to borrowers with very little equity security in their property.

It’s therefore no surprise that thousands of Northern Rock Together borrowers have fallen into financial difficulty subsequently. Thousands of people around the UK that had large NRAM unsecured loans have entered debt management plans, IVAs, Scottish trust deeds or bankruptcy.

If you’re currently in a debt management plan what will happen to a refund that is due to you now? Assuming that the Northern Rock unsecured loan is included in your debt management plan the balance should be reduced rather than a cheque being sent to you. This may mean that your debt management arrangement will change to increase the amount paid to other creditors each month (funded by a reduction in the amount paid to NRAM). It should also mean that your plan reaches completion sooner.

How about if you have a Northern Rock Together mortgage and loan and you did not include the loan in your DMP? This isn’t uncommon. Some people did not realise that the unsecured loan was separate to their mortgage so did not let their debt management provider know about it. Other people feared including it in a debt management plan on the misapprehension that it was part of their mortgage. In such a scenario your loan balance will be reduced. This may have the effect of reducing (slightly perhaps) your monthly payment for your mortgage and loan in the future.

If you had a Northern Rock loan that was affected and it has subsequently been fully repaid you may be in line to receive a substantial cheque.

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Beverley Budsworth Phil Corfield Debt Management Plan Expert DMP Adviser
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