Interest rate rises caught the UK's fifth largest mortgage lender, Northern Rock, on the back foot and profits have suffered as a result.
Northern Rock, like many other mortgage lenders, expected rates to peak at 5.5% during 2007 but have now revised their prediction to 6%.
Interim results for the first half of 2007 reveal that profits for the six months to 30 June were £296.1m, just £2.2m more than the £293.9m seen during the same period in 2006.
The lender says that interest rate rises are causing a decline in mortgage volume but this is made up for by increasing mortgage values.
Northern Rock failed to fully hedge itself against rising borrowing costs when agreeing fixed rate deals at the beginning of the year and this has hit profit figures.
Northern Rock warned shareholders that rising interest rates are likely to have a negative impact on profits and says: “at this very early stage we expect to be at the bottom of this range for 2008, broadly in line with current mean consensus.
“The final outcome will be affected by how the interest rate and credit risk environments emerge and the prospects for the mortgage market.”
Some national newspapers claim that Northern Rock has suffered more than other lenders because it raises more funds in the wholesale market, which charges interest at the overnight variable Libor rate, than its rivals.
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