Northern Rock, the bank nationalised by the British government says the UK mortgage market remains ‘uncertain’ with an increase in arrears.

Mortgages three months and more in arrears were 0.95% at the end of April compared to and 0.57% by December 31.

In a statement issued today, the bank said it was optimistic arrears will not rise ‘in the coming months’ as it strengthens risk controls on late payments.

Chairman Ron Sandler said, “while arrears have increased, the credit quality of the loan book remains satisfactory. We remain firmly focused on our business priorities of repaying the government debt, releasing the guarantee arrangements and in due course returning Northern Rock to private ownership.”

The English bank is transferring its customers to other lenders in a move aimed at redeeming mortgages. It hopes that this new strategy will help reduce debts.

The bank says it will ‘develop further’ a panel of mortgage intermediaries to facilitate a smooth transfer of customers to other companies at the end of their fixed or discounted periods.

It said redemption in the first quarter of this year were in line with the bank’s expectations.

The Newcastle-based bank also announced that it will gradually increase mortgage lending. First quarter residential loans were £1.2 billion down from £5.1 billion [$10 billion] in the year-earlier period.

The lender has repaid an estimated £2.8 billion of the 26.9 billion it borrowed from the bank of England last year. Northern Rock says the savings deposits have risen to £12.8 billion as of March 31.

The bank has forecast that it will make a loss this year and consequently will cut as many as 2000 jobs by 2011.

Northern Rock borrowed from the Bank of England after it ran out of money during the wholesale credit market seizures last August.