Northern Rock announces £585m loss

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The recently-nationalised lender said its bad debts provision stood at £351.8 million as 1.18% of its mortgage book slipped to more than three months in arrears at June 30 - more than double the amount at the end of 2007.

But the former bank said it had managed to repay £9.4 billion of the Bank of England loans, taking the amount owed at the end of June down to £17.5 billion.

Northern Rock's executive chairman Ron Sandler said: "The external environment has deteriorated and the consequences of this for Northern Rock are increased credit losses."

Northern Rock said the number of properties in its possession jumped from 2,215 at the start of the year to 3,710 at the end of June.

In a further sign of customers finding it harder to make ends meet, the lender also said it was increasing staff numbers in debt management from 185 to around 500.

Before running into funding problems last summer, Northern Rock was one of the UK's biggest and most aggressive mortgage providers, advancing loans worth as much as 125% of home values.

But with house prices estimated to fall by up to 20% by the end of next year, tens of thousands of its customers could be left in a position of negative equity - where the value of the mortgage exceeds the house price value. That could make it difficult for them to find other sources of finance.

Northern Rock was nationalised in February after the Government failed to find a buyer for the business that provided "sufficient value for money to the taxpayer".

Under a recovery strategy outlined earlier this year, Mr Sandler promised to repay the Bank of England loans by the end of 2010. He also planned to halve the balance sheet to £50 billion by the end of 2011 by stopping all business lending and accelerating mortgage redemptions for existing customers, and warned of "significant losses" for the lender in 2008 as the credit market turmoil continued.