Northern Rock Problems: How they affect you

The global economic uncertainty resulting from the sub-prime loans crisis in the United States finally hit home for consumers on Friday as Northern Rock asked the Bank of England for emergency funding. We look at what this means for investors, borrowers and the mortgage market in general.

Despite reassurances from industry experts and Northern Rock itself, people with savings accounts with Northern Rock have withdrawn almost £2 billion since Friday's announcement.

And withdrawals are likely to continue this week despite reassurances from Northern Rock chief executive Adam J Applegarth.

“Your savings are secure and there is no need for you to withdraw your money based on our recent announcement,” he said in a statement to customers released Sunday.

The root of the problem lies in the fact that banks around the world have stopped lending to each other since August 9 due to the knock-on effects of the sub-prime crisis in the United States.

Unlike many banks, Northern Rock borrows from other financial institutions, and does not use customer deposits. It emerged over the weekend that the bank almost sold itself to Lloyds TSB, before it turned to the Bank of England for help.

The Bank of England is now urging other financial institutions to consider a takeover of Northern Rock, saying it will leave emergency funding in place. However, with the lack of credit available to banks, potential buyers may be in short supply.

The bank's website was still struggling to cope on Monday as savers attempted to transfer funds.

And Northern Rock shareholders were bracing themselves for another turbulent week after share prices plummeted 32% on Friday.

While it is difficult to predict how long the current global credit crunch will last, experts say that lenders will be tightening their belts for at least another few months.

For the average consumer this is likely to mean that loans, and especially mortgages, will be harder to come by. Already, banks have become stricter on who they give loans to, and mortgage interest rates with some lenders went up last week.

As well as higher costs, consumers are likely to face stricter credit checks when applying for loans. The first to be affected will most likely be those in the low income bracket, the self employed and those with a poor credit rating. However, borrowers are unlikely to see any rise in interest rates from the Bank of England for as long as the current credit crunch continues.

As access to finance for prospective house buyers decreases, so too will the demand for homes. The supply and demand model would dictate that this would lead to a drop in house prices, although there is no sign of this yet.

Conversely, decreased demand for homes has traditionally led to an increase in demand for rental properties, so we could also see a spike in rental costs. If you are thinking of taking out a mortgage or a loan, it may be prudent to speed up the application process as much as possible.

Northern Rock's woes have inevitably had a knock-on affect and other bank's share prices also dipped on Friday. While Northern Rock was particularly vulnerable in the current climate because of its borrowing policies, other banks could be forced to turn to the Bank of England for help in the coming weeks.