Britain's 'bad bank' warns of interest rate dangers ahead

[October 30, 2014]  By Matt Scuffham

LONDON (Reuters) - Britain's 'bad bank' has already begun contacting around 20,000 customers whom it thinks might have problems repaying their mortgages when interest rates start to rise, its chief executive said on Thursday.

British lenders are preparing for the first interest rate rise since 2007, expected next year. Worried that borrowers could struggle after years of rock-bottom rates, major lenders like Royal Bank of Scotland have said they would pre-empt trouble by contacting worried customers.

"We've already started that process. It's obviously going to be an issue for some customers," said Richard Banks, chief executive of UK Asset Resolution (UKAR), Britain's seventh-largest mortgage lender.

"If interest rates increase by 1 percent we would estimate that potentially around 20,000 customers might have problems."

UKAR, set up in 2010, holds the loans of Northern Rock and Bradford & Bingley, which both effectively collapsed during the financial crisis.

It is already helping customers who have fallen behind by helping them come up with repayment plans. Banks said UKAR had reduced the number of customers whose mortgages are in arrears by three or more months by 65 percent since its creation.

Banks said UKAR discussed strategies for dealing with customers in arrears with other banks and building societies.

Britain's financial watchdog on Wednesday fined Yorkshire Building Society 4.1 million pounds for failing to deal properly with thousands of customers who fell behind on their home loan payments.

"We have an open door policy. Two or three building societies and other banks have had exchange visits with us," he said.

UKAR said on Thursday it had repaid 1.6 billion pounds ($2.6 billion) to the government in the six months to the end of September, meaning it has so far paid back 12 billion pounds of the 48.7 billion it owed.

(1 US dollar = 0.6252 British pound)

(Reporting by Matt Scuffham; Editing by Clara Ferreira Marques)

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